UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 20152016
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to_________
Commission File Number 0-4057
PORTSMOUTH SQUARE, INC.
(Exact name of registrant as specified in its charter)
| CALIFORNIA | 94-1674111 |
| (State or other jurisdiction of | (I.R.S. Employer |
| Incorporation or organization) | Identification No.) |
10940 Wilshire Blvd., Suite 2150,1100 Glendon Avenue, PH1, Los Angeles, California 90024
(Address of principal executive offices)(Zip Code)
(310) 889-2500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
| Large accelerated filer¨ | Accelerated filer¨ |
| Non-accelerated filer¨ | Smaller reporting companyx |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):
¨ Yes x No
The number of shares outstanding of registrant’s Common Stock, as of January 8, 2016,February 7, 2017 was 734,183.
TABLE OF CONTENTS
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FINANCIAL INFORMATION
Item 1 – Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| As of | December 31, 2015 | June 30, 2015 | ||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Investment in Hotel, net | $ | 37,920,000 | $ | 36,567,000 | ||||
| Investment in real estate | 973,000 | 973,000 | ||||||
| Investment in marketable securities | 4,011,000 | 1,301,000 | ||||||
| Other investments, net | 471,000 | 5,003,000 | ||||||
| Cash and cash equivalents | 3,321,000 | 1,077,000 | ||||||
| Restricted cash - mortgage impounds | 685,000 | 587,000 | ||||||
| Accounts receivable - Hotel, net | 1,129,000 | 6,791,000 | ||||||
| Other assets, net | 3,821,000 | 3,399,000 | ||||||
| Deferred tax asset | 9,133,000 | 8,351,000 | ||||||
| Total assets | $ | 61,464,000 | $ | 64,049,000 | ||||
| LIABILITIES AND SHAREHOLDERS' DEFICIT | ||||||||
| Liabilities: | ||||||||
| Accounts payable and other liabilities | $ | 13,479,000 | $ | 14,622,000 | ||||
| Related party and other notes payable | 8,893,000 | 9,155,000 | ||||||
| Mortgage notes payable - Hotel | 117,000,000 | 117,000,000 | ||||||
| Total liabilities | 139,372,000 | 140,777,000 | ||||||
| Commitments and contingencies | ||||||||
| Shareholders' deficit: | ||||||||
| Common stock, no par value: Authorized shares - 750,000; 734,183 shares issued and outstanding shares | 2,092,000 | 2,092,000 | ||||||
| Accumulated deficit | (73,706,000 | ) | (72,523,000 | ) | ||||
| Total Portsmouth shareholders' deficit | (71,614,000 | ) | (70,431,000 | ) | ||||
| Noncontrolling interest | (6,294,000 | ) | (6,297,000 | ) | ||||
| Total shareholders' deficit | (77,908,000 | ) | (76,728,000 | ) | ||||
| Total liabilities and shareholders' deficit | $ | 61,464,000 | $ | 64,049,000 | ||||
| As of | December 31, 2016 | June 30, 2016 | ||||||
| ASSETS | ||||||||
| Investment in Hotel, net | $ | 36,582,000 | $ | 37,744,000 | ||||
| Investment in real estate | 973,000 | 973,000 | ||||||
| Investment in marketable securities | 3,803,000 | 4,038,000 | ||||||
| Other investments, net | 348,000 | 359,000 | ||||||
| Cash and cash equivalents | 2,314,000 | 3,378,000 | ||||||
| Restricted cash - mortgage impounds | 1,811,000 | 898,000 | ||||||
| Accounts receivable - Hotel, net | 881,000 | 3,218,000 | ||||||
| Other assets, net | 1,192,000 | 1,274,000 | ||||||
| Deferred tax asset | 10,760,000 | 11,088,000 | ||||||
| Total assets | $ | 58,664,000 | $ | 62,970,000 | ||||
| LIABILITIES AND SHAREHOLDERS' DEFICIT | ||||||||
| Liabilities: | ||||||||
| Accounts payable and other liabilities | $ | 14,128,000 | $ | 17,181,000 | ||||
| Due to securities broker | 689,000 | 291,000 | ||||||
| Obligations for securities sold | 138,000 | 29,000 | ||||||
| Related party and other notes payable | 8,920,000 | 11,246,000 | ||||||
| Mortgage notes payable - Hotel, net | 116,216,000 | 116,160,000 | ||||||
| Total liabilities | 140,091,000 | 144,907,000 | ||||||
| Commitments and contingencies and subsequent event | ||||||||
| Shareholders' deficit: | ||||||||
| Common stock, no par value: Authorized shares - 750,000; 734,183 shares issued and outstanding shares | 2,092,000 | 2,092,000 | ||||||
| Accumulated deficit | (76,971,000 | ) | (77,365,000 | ) | ||||
| Total Portsmouth shareholders' deficit | (74,879,000 | ) | (75,273,000 | ) | ||||
| Noncontrolling interest | (6,548,000 | ) | (6,664,000 | ) | ||||
| Total shareholders' deficit | (81,427,000 | ) | (81,937,000 | ) | ||||
| Total liabilities and shareholders' deficit | $ | 58,664,000 | $ | 62,970,000 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| For the three months ended December 31, | 2015 | 2014 | ||||||
| Revenue - Hotel | $ | 13,713,000 | $ | 14,044,000 | ||||
| Costs and operating expenses | ||||||||
| Hotel operating expenses | (11,969,000 | ) | (12,033,000 | ) | ||||
| Hotel depreciation and amortization expense | (709,000 | ) | (664,000 | ) | ||||
| General and administrative expense | (170,000 | ) | (157,000 | ) | ||||
| Total costs and operating expenses | (12,848,000 | ) | (12,854,000 | ) | ||||
| Income from operations | 865,000 | 1,190,000 | ||||||
| Other income (expense) | ||||||||
| Interest expense - mortgage | (1,941,000 | ) | (1,939,000 | ) | ||||
| Loss on disposal of assets | - | (51,000 | ) | |||||
| Net loss on marketable securities | (1,878,000 | ) | (554,000 | ) | ||||
| Net unrealized loss on other investments | (13,000 | ) | 4,000 | |||||
| Impairment loss on other investments | (82,000 | ) | - | |||||
| Dividend and interest income | - | 166,000 | ||||||
| Trading and margin interest expense | (26,000 | ) | (70,000 | ) | ||||
| Other expense, net | (3,940,000 | ) | (2,444,000 | ) | ||||
| Loss before income taxes | (3,075,000 | ) | (1,254,000 | ) | ||||
| Income tax benefit | 1,225,000 | 547,000 | ||||||
| Net loss | (1,850,000 | ) | (707,000 | ) | ||||
| Less: Net loss attributable to the noncontrolling interest | 72,000 | 54,000 | ||||||
| Net loss attributable to Portsmouth | $ | (1,778,000 | ) | $ | (653,000 | ) | ||
| Basic and diluted net loss per share attributable to Portsmouth | $ | (2.42 | ) | $ | (0.89 | ) | ||
| Weighted average number of common shares outstanding - basic and diluted | 734,183 | 734,183 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| For the six months ended December 31, | 2015 | 2014 | ||||||||||||||
| For the three months ended December 31, | 2016 | 2015 | ||||||||||||||
| Revenue - Hotel | $ | 28,851,000 | $ | 28,874,000 | $ | 12,837,000 | $ | 13,713,000 | ||||||||
| Costs and operating expenses | ||||||||||||||||
| Hotel operating expenses | (23,162,000 | ) | (23,871,000 | ) | (9,926,000 | ) | (11,969,000 | ) | ||||||||
| Hotel depreciation and amortization expense | (1,422,000 | ) | (1,306,000 | ) | (760,000 | ) | (709,000 | ) | ||||||||
| General and administrative expense | (373,000 | ) | (345,000 | ) | (144,000 | ) | (170,000 | ) | ||||||||
| Total costs and operating expenses | (24,957,000 | ) | (25,522,000 | ) | (10,830,000 | ) | (12,848,000 | ) | ||||||||
| Income from operations | 3,894,000 | 3,352,000 | 2,007,000 | 865,000 | ||||||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense - mortgage | (3,882,000 | ) | (3,963,000 | ) | (1,909,000 | ) | (1,941,000 | ) | ||||||||
| Loss on disposal of assets | (30,000 | ) | (51,000 | ) | ||||||||||||
| Net loss on marketable securities | (1,774,000 | ) | (1,033,000 | ) | (997,000 | ) | (1,878,000 | ) | ||||||||
| Net unrealized loss on other investments | (32,000 | ) | (21,000 | ) | - | (13,000 | ) | |||||||||
| Impairment loss on other investments | (82,000 | ) | - | (6,000 | ) | (82,000 | ) | |||||||||
| Dividend and interest income | 2,000 | 169,000 | 10,000 | - | ||||||||||||
| Trading and margin interest expense | (58,000 | ) | (161,000 | ) | (44,000 | ) | (26,000 | ) | ||||||||
| Other expense, net | (5,856,000 | ) | (5,060,000 | ) | ||||||||||||
| Total other expense | (2,946,000 | ) | (3,940,000 | ) | ||||||||||||
| Loss before income taxes | (1,962,000 | ) | (1,708,000 | ) | (939,000 | ) | (3,075,000 | ) | ||||||||
| Income tax benefit | 782,000 | 729,000 | 377,000 | 1,225,000 | ||||||||||||
| Net loss | (1,180,000 | ) | (979,000 | ) | (562,000 | ) | (1,850,000 | ) | ||||||||
| Less: Net (income) loss attributable to the noncontrolling interest | (3,000 | ) | 41,000 | (9,000 | ) | 72,000 | ||||||||||
| Net loss attributable to Portsmouth | $ | (1,183,000 | ) | $ | (938,000 | ) | $ | (571,000 | ) | $ | (1,778,000 | ) | ||||
| Basic and diluted net loss per share attributable to Portsmouth | $ | (1.61 | ) | $ | (1.28 | ) | $ | (0.78 | ) | $ | (2.42 | ) | ||||
| Weighted average number of common shares outstanding - basic and diluted | 734,183 | 734,183 | 734,183 | 734,183 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| For the six months ended December 31, | 2016 | 2015 | ||||||
| Revenue - Hotel | $ | 27,442,000 | $ | 28,851,000 | ||||
| Costs and operating expenses | ||||||||
| Hotel operating expenses | (20,182,000 | ) | (23,162,000 | ) | ||||
| Hotel depreciation and amortization expense | (1,424,000 | ) | (1,422,000 | ) | ||||
| General and administrative expense | (298,000 | ) | (373,000 | ) | ||||
| Total costs and operating expenses | (21,904,000 | ) | (24,957,000 | ) | ||||
| Income from operations | 5,538,000 | 3,894,000 | ||||||
| Other income (expense) | ||||||||
| Interest expense - mortgage | (3,897,000 | ) | (3,882,000 | ) | ||||
| Loss on disposal of assets | - | (30,000 | ) | |||||
| Net loss on marketable securities | (735,000 | ) | (1,774,000 | ) | ||||
| Net unrealized loss on other investments | - | (32,000 | ) | |||||
| Impairment loss on other investments | (11,000 | ) | (82,000 | ) | ||||
| Dividend and interest income | 20,000 | 2,000 | ||||||
| Trading and margin interest expense | (77,000 | ) | (58,000 | ) | ||||
| Total other expense | (4,700,000 | ) | (5,856,000 | ) | ||||
| Income (loss) before income taxes | 838,000 | (1,962,000 | ) | |||||
| Income tax (expense) benefit | (328,000 | ) | 782,000 | |||||
| Net income (loss) | 510,000 | (1,180,000 | ) | |||||
| Less: Net income attributable to the noncontrolling interest | (116,000 | ) | (3,000 | ) | ||||
| Net income (loss) attributable to Portsmouth | $ | 394,000 | $ | (1,183,000 | ) | |||
| Basic and diluted net income (loss) per share attributable to Portsmouth | $ | 0.54 | $ | (1.61 | ) | |||
| Weighted average number of common shares outstanding - basic and diluted | 734,183 | 734,183 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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CONDENDSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the six months ended December 31, | 2015 | 2014 | 2016 | 2015 | ||||||||||||
| Cash flows from operating activities: | ||||||||||||||||
| Net loss | $ | (1,180,000 | ) | $ | (979,000 | ) | ||||||||||
| Adjustments to reconcile net loss to net cash privided by (used in) operating activities: | ||||||||||||||||
| Net income (loss) | $ | 510,000 | $ | (1,180,000 | ) | |||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||||
| Net unrealized loss on marketable securities | 1,749,000 | 1,089,000 | 773,000 | 1,749,000 | ||||||||||||
| Unrealized loss (gain) on other investments | 41,000 | (4,000 | ) | |||||||||||||
| Unrealized loss on other investments | - | 41,000 | ||||||||||||||
| Impairment loss on other investments | 82,000 | - | 11,000 | 82,000 | ||||||||||||
| Loss on disposal of assets | 30,000 | 51,000 | - | 30,000 | ||||||||||||
| Deferred tax asset | 328,000 | (782,000 | ) | |||||||||||||
| Depreciation and amortization | 1,422,000 | 1,306,000 | 1,424,000 | 1,422,000 | ||||||||||||
| Changes in assets and liabilities: | ||||||||||||||||
| Investment in marketable securities | (50,000 | ) | 132,000 | (538,000 | ) | (50,000 | ) | |||||||||
| Accounts receivable | 5,662,000 | 596,000 | 2,337,000 | 5,662,000 | ||||||||||||
| Other assets | (328,000 | ) | (367,000 | ) | 194,000 | (328,000 | ) | |||||||||
| Accounts payable and other liabilities | (1,143,000 | ) | (3,368,000 | ) | (3,053,000 | ) | (1,143,000 | ) | ||||||||
| Due to securities broker | - | (280,000 | ) | 398,000 | - | |||||||||||
| Obligations for securities sold | - | 95,000 | 109,000 | - | ||||||||||||
| Deferred tax asset | (782,000 | ) | (729,000 | ) | ||||||||||||
| Net cash provided by (used in) operating activities | 5,503,000 | (2,458,000 | ) | |||||||||||||
| Net cash provided by operating activities | 2,493,000 | 5,503,000 | ||||||||||||||
| Cash flows from investing activities: | ||||||||||||||||
| Payments for hotel furniture, equipment and building improvements | (2,899,000 | ) | (2,916,000 | ) | (318,000 | ) | (2,899,000 | ) | ||||||||
| Net cash used in investing activities | (2,899,000 | ) | (2,916,000 | ) | (318,000 | ) | (2,899,000 | ) | ||||||||
| Cash flows from financing activities: | ||||||||||||||||
| Restricted cash - (payments to) withdrawal of mortgage impounds, net | (98,000 | ) | 116,000 | |||||||||||||
| Net (payments) proceeds from mortgage and other notes payable | (262,000 | ) | 4,676,000 | |||||||||||||
| Net cash (used in) provided by financing activities | (360,000 | ) | 4,792,000 | |||||||||||||
| Restricted cash - payments to mortgage impounds, net | (913,000 | ) | (98,000 | ) | ||||||||||||
| Net payments to related party and other notes payable | (2,326,000 | ) | (262,000 | ) | ||||||||||||
| Net cash used in financing activities | (3,239,000 | ) | (360,000 | ) | ||||||||||||
| Net increase (decrease) in cash and cash equivalents | 2,244,000 | (582,000 | ) | |||||||||||||
| Net (decrease) increase in cash and cash equivalents | (1,064,000 | ) | 2,244,000 | |||||||||||||
| Cash and cash equivalents at the beginning of the period | 1,077,000 | 1,058,000 | 3,378,000 | 1,077,000 | ||||||||||||
| Cash and cash equivalents at the end of the period | $ | 3,321,000 | $ | 476,000 | $ | 2,314,000 | $ | 3,321,000 | ||||||||
| Supplemental information: | ||||||||||||||||
| Interest paid | $ | 3,882,000 | $ | 3,985,000 | $ | 3,922,000 | $ | 3,882,000 | ||||||||
| Non-cash transaction: | ||||||||||||||||
| Conversion of other investments to marketable securities | $ | 4,410,000 | $ | - | $ | - | $ | 4,410,000 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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PORTSMOUTH SQUARE, INC.
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, 2015.2016. The June 30, 20152016 Condensed Consolidated Balance Sheet was derived from the Company’s Form 10-K for the year ended June 30, 2015.2016.
The results of operations for the three and six months ended December 31, 20152016 are not necessarily indicative of results to be expected for the full fiscal year ending June 30, 2016.2017.
ForPortsmouth’s primary business is conducted through its general and limited partnership interest in Justice Investors Limited Partnership, a California limited partnership (“Justice” or the three“Partnership”).Portsmouth has a 93% limited partnership interest in Justice and six months ended December 31, 2015 and 2014,is the Company had no componentssole general partner. The financial statements of comprehensive income other than net income itself.Justice are consolidated with those of the Company.
As of December 31, 2015,2016, Santa Fe Financial Corporation (“Santa Fe”), a public company, owns approximately 68.8% of the outstanding common shares of Portsmouth Square, Inc. (“Portsmouth” or the “Company”). Santa Fe is an 81.9%81.7%-owned subsidiary of The InterGroup Corporation (“InterGroup”), a public company. InterGroup also directly owns approximately 13.1%13.3% of the common stock of Portsmouth.
Portsmouth’s primary business is conducted through its general and limited partnership interest in Justice Investors, a California limited partnership (“Justice” or the “Partnership”).Portsmouth controls approximately 93% of the voting interest in Justice and is the sole general partner.
Justice, through its subsidiaries Justice Holdings Company, LLC (“Holdings”), a Delaware Limited Liability Company, Justice Operating Company, LLC (“Operating”) and Justice Mezzanine Company, LLC (“Mezzanine”), owns a 543-room hotel property located at 750 Kearny Street, San Francisco California, known as the Hilton San Francisco Financial District (the Hotel)“Hotel”) and related facilities including a five level underground parking garage. Holdings and Mezzanine are both a wholly-owned subsidiaries of the Partnership; Operating is a wholly-owned subsidiary of Mezzanine. Mezzanine is the Mezzanine 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). Justice also has a Management Agreementmanagement agreement with Prism Hospitality L.P. (“Prism”) to perform certain management functions for the Hotel. The management agreement with Prism had an original term of ten years, and can be terminatedsubject to the Partnership’s right to terminate at any time with or without cause by the Partnership owner.cause. Effective January 2014, the management agreement with Prism was amended by the Partnership.Partnership to change the nature of the services provided by Prism and the compensation payable to Prism, among other things. Effective December 1, 2013, GMP Management, Inc. (“GMP”), a company owned by a Justice limited partner and a related party, also providesprovided management services for the Partnership pursuant to a management services agreement, with a three year term, subject to the Partnership’s right to terminate earlier for cause. In June 2016, GMP resigned. After a lengthy review process of several national third party hotel management companies, on February 1, 2017, Justice entered into a management agreement with Interstate Management Services Agreement, whichCompany, LLC (“Interstate”) to manage the Hotel with an effective takeover date of February 3, 2017. The term of management agreement is for a terman initial period of 310 years but which can be terminated earlier bycommencing on the Partnershiptakeover date and automatically renews for cause.an additional year not to exceed five years in the aggregate subject to certain conditions.
Portsmouth also receives management fees as a general partner of Justice for its services in overseeing and managing the Partnership’s assets. Those fees are eliminated in consolidation.
Basic loss per share is calculated based upon the weighted average number of common shares outstanding during each period. During the three and six months December 31, 2015 and 2014, the Company did not have any potentially dilutive securities outstanding.
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The parking garage that is part of the Hotel property was managed by Ace Parking pursuant to a contract with the Partnership. The contract was terminated with an effective termination date of October 4, 2016. The Company began managing the parking garage in-house after the termination of Ace Parking.
Recently Issued Accounting Pronouncements
In November 2015,August 2014, the FASB issued Accounting Standards Update 2015-17,ASU No. 2014-15,Income Taxes: Balance Sheet ClassificationDisclosure of Deferred Taxes,which is intendedUncertainties about an Entity’s Ability to improve how deferred taxesContinue as a Going Concern that requires management to evaluate whether there are classifiedconditions and events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the financial statements are issued on organizations’ balance sheets by eliminating the current requirement for organizations to present deferred tax liabilitiesboth an interim and assets as current and noncurrent in a classified balance sheet. Instead, organizations will now beannual basis. Management is required to classify all deferred tax assets and liabilitiesprovide certain footnote disclosures if it concludes that substantial doubt exists or when its plans alleviate substantial doubt about the Company’s ability to continue as noncurrent. The changes area going concern. ASU No. 2014-15 becomes effective for financial statements issued for annual periods beginning after December 15, 2016 and for interim reporting periods within those annual periods, which meansthereafter. The Company does not expect the first quarteradoption of the Company’s fiscal year 2018. We are currently reviewing thethis ASU and assessing the potentialto have a material impact on theits consolidated financial statements.
In July 2015,On June 16, 2016, the FASB issued Accounting Standard Update No. 2015-11,ASU 2016-13, “Simplifying theFinancial Instruments - Credit Losses (Topic 326): Measurement of InventoryCredit Losses on Financial Instruments(".” This ASU 2015-11")modifies the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which requires entities to measure most inventory at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling priceswill result in the ordinary coursemore timely recognition of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance islosses. ASU No. 2016-13 will be effective for annualus as of January 1, 2020. The Company is currently reviewing the effect of ASU No. 2016-13.
On August 26, 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows - Classification of Certain Cash Receipts and interim periods beginning after December 15, 2016. Though permitted,Cash Payments (Topic230).” This ASU is intended to reduce the diversity in practice around how certain transactions are classified within the statement of cash flows. The Company does not planadopted ASU No. 2016-15 in the first quarter of 2017 with no material impact to early adopt. We are currently evaluating the impact ASU 2015-11 will have on the Company's consolidatedour financial statements.
In April 2015, the FASB issued ASU 2015-03,Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 is effective for annual and interim periods within these annual periods beginning after December 15, 2015 and early application is permitted.We are in the process of evaluating this guidance.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810):Amendments to the Consolidation Analysis, which changes the consolidation analysis for both the variable interest model and for the voting model for limited partnerships and similar entities. ASU 2015-02 is effective for annual and interim periods beginning after December 15, 2015 and for interim periods within those fiscal years, early application is permitted. ASU 2015-02 provides for one of two methods of transition: retrospective application to each prior period presented; or recognition of the cumulative effect of retrospective application of the new standard in the period of initial application. We are in the process of evaluating this guidance and our method of adoption.
In April 2014, the FASB issued ASU 2014-08,Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360)(“ASU 2014-08”). The amendments in ASU 2014-08 provide guidance for the recognition of discontinued operations, change the requirements for reporting discontinued operations in ASC 205-20, “Discontinued Operations” (“ASC 205-20”) and require additional disclosures about discontinued operations. ASU 2014-08 is effective for the Company for annual periods beginning after December 15, 2014. The Company adopted this standard induring the quarter ended Septemberand reclassified the debt issuance costs of $840,000 from Other Assets to Mortgage notes payable – Hotel, net on the June 30, 2015 and it did not have an impact on its2016 consolidated financial statements as it relates primarily to how items are presented in the financial statements.balance sheet.
In May 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standard Update No. 2014-09,Revenue from Contracts with Customers(“ASU 2014-09”) amending revenue recognition guidance and requiring more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The guidance is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted for annual and interim reporting periods beginning after December 15, 2016. The Company does not plan to early adopt. We are currently evaluating the impact ASU 2014-09 will have on the Company's consolidated financial statements.
In August 2014, the FASB issued Accounting Standard Update No. 2014-15,Presentation of Financial Statements—Going Concern("ASU 2014-15"). The new guidance explicitly requires that management assess an entity's ability to continue as a going concern and may require additional detailed disclosures. ASU 2014-15 is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Though permitted, the Company does not plan to early adopt. The Company does not believe that this standard will have a significant impact on its consolidated financial statements.
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| - 8 - |
NOTE 2 – INVESTMENT IN HOTEL, NET
Investment in hotel consisted of the following as of:
| Accumulated | Net Book | Accumulated | Net Book | |||||||||||||||||||||
| December 31, 2015 | Cost | Depreciation | Value | |||||||||||||||||||||
| December 31, 2016 | Cost | Depreciation | Value | |||||||||||||||||||||
| Land | $ | 1,124,000 | $ | - | $ | 1,124,000 | $ | 1,124,000 | $ | - | $ | 1,124,000 | ||||||||||||
| Furniture and equipment | 26,704,000 | (22,346,000 | ) | 4,358,000 | 27,674,000 | (23,840,000 | ) | 3,834,000 | ||||||||||||||||
| Building and improvements | 55,527,000 | (23,089,000 | ) | 32,438,000 | 55,918,000 | (24,294,000 | ) | 31,624,000 | ||||||||||||||||
| $ | 83,355,000 | $ | (45,435,000 | ) | $ | 37,920,000 | $ | 84,716,000 | $ | (48,134,000 | ) | $ | 36,582,000 | |||||||||||
| Accumulated | Net Book | Accumulated | Net Book | |||||||||||||||||||||
| June 30, 2015 | Cost | Depreciation | Value | |||||||||||||||||||||
| June 30, 2016 | Cost | Depreciation | Value | |||||||||||||||||||||
| Land | $ | 1,124,000 | $ | - | $ | 1,124,000 | $ | 1,124,000 | $ | - | $ | 1,124,000 | ||||||||||||
| Furniture and equipment | 25,958,000 | (21,605,000 | ) | 4,353,000 | 28,857,000 | (23,097,000 | ) | 5,760,000 | ||||||||||||||||
| Building and improvements | 53,641,000 | (22,551,000 | ) | 31,090,000 | 54,517,000 | (23,657,000 | ) | 30,860,000 | ||||||||||||||||
| $ | 80,723,000 | $ | (44,156,000 | ) | $ | 36,567,000 | $ | 84,498,000 | $ | (46,754,000 | ) | $ | 37,744,000 | |||||||||||
NOTE 3 - INVESTMENT IN MARKETABLE SECURITIES
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.
At December 31, 20152016 and June 30, 2015,2016, 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 | Fair | Gross | Gross | Net | Fair | |||||||||||||||||||||||||||||||||
| Investment | Cost | Unrealized Gain | Unrealized Loss | Unrealized Loss | Value | Cost | Unrealized Gain | Unrealized Loss | Unrealized Loss | Value | ||||||||||||||||||||||||||||||
| As of December 31, 2015 | ||||||||||||||||||||||||||||||||||||||||
| As of December 30, 2016 | ||||||||||||||||||||||||||||||||||||||||
| Corporate | ||||||||||||||||||||||||||||||||||||||||
| Equities | $ | 6,469,000 | $ | 157,000 | $ | (2,615,000 | ) | $ | (2,458,000 | ) | $ | 4,011,000 | $ | 7,415,000 | $ | 224,000 | $ | (3,836,000 | ) | $ | (3,612,000 | ) | $ | 3,803,000 | ||||||||||||||||
| As of June 30, 2015 | ||||||||||||||||||||||||||||||||||||||||
| As of June 30, 2016 | ||||||||||||||||||||||||||||||||||||||||
| Corporate | ||||||||||||||||||||||||||||||||||||||||
| Equities | $ | 2,009,000 | $ | 240,000 | $ | (948,000 | ) | $ | (708,000 | ) | $ | 1,301,000 | $ | 6,877,000 | $ | 272,000 | $ | (3,111,000 | ) | $ | (2,839,000 | ) | $ | 4,038,000 | ||||||||||||||||
As of December 31, 2015,2016 and June 30, 2016, approximately 88%61% and 77%, respectively, of the investment marketable securities balance above is comprised of the common stock of Comstock Mining, Inc.
As of December 31, 20152016 and June 30, 2015,2016, the Company had $1,137,000$1,314,000 and $940,000,$1,138,000, respectively, of unrealized losses related to securities held for over one year.
- 9 -
Net loss (gain) on marketable securities on the statement of operations is comprised of realized and unrealized gains (losses). Below is the composition of the two components for the three and six months December 31, 20152016 and 2014,2015, respectively.
| For the three months ended December 31, | 2015 | 2014 | ||||||
| Realized gain on marketable securities | $ | - | $ | 13,000 | ||||
| Unrealized loss on marketable securities | (1,878,000 | ) | (567,000 | ) | ||||
| Net loss on marketable securities | $ | (1,878,000 | ) | $ | (554,000 | ) | ||
| - 9 - |
| For the six months ended December 31, | 2015 | 2014 | ||||||
| Realized (loss) gain on marketable securities | $ | (25,000 | ) | $ | 56,000 | |||
| Unrealized loss on marketable securities | (1,749,000 | ) | (1,089,000 | ) | ||||
| Net loss on marketable securities | $ | (1,774,000 | ) | $ | (1,033,000 | ) | ||
| For the three months ended December 31, | 2016 | 2015 | ||||||
| Realized on marketable securities | $ | (13,000 | ) | $ | - | |||
| Unrealized loss on marketable securities | (984,000 | ) | (1,878,000 | ) | ||||
| Net loss on marketable securities | $ | (997,000 | ) | $ | (1,878,000 | ) | ||
| For the six months ended December 31, | 2016 | 2015 | ||||||
| Realized gain (loss) on marketable securities | $ | 38,000 | $ | (25,000 | ) | |||
| Unrealized loss on marketable securities | (773,000 | ) | (1,749,000 | ) | ||||
| Net loss on marketable securities | $ | (735,000 | ) | $ | (1,774,000 | ) | ||
NOTE 4 – OTHER INVESTMENTS, NET
The Company may also invest, with the approval of the Securities Investment Committeesecurities 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 balance sheet as part of other investments, net of other than temporary impairment losses. Other investments also include non-marketable warrants carried at fair value.
Other investments, net consist of the following:
| Type | December 31, 2015 | June 30, 2015 | ||||||
| Preferred stock - Comstock, at cost | $ | - | $ | 4,410,000 | ||||
| Private equity hedge fund, at cost | 416,000 | 456,000 | ||||||
| Other preferred stock | 51,000 | 112,000 | ||||||
| Warrants - at fair value | 4,000 | 25,000 | ||||||
| $ | 471,000 | $ | 5,003,000 | |||||
As of June 30, 2015, the Company had $4,410,000 (4,410 preferred shares) held in Comstock Mining, Inc. (“Comstock” – OTCBB: LODE) 7 1/2% Series A-1 Convertible Preferred Stock (the “A-1 Preferred”). On August 27, 2015, all of such preferred stock was converted into common stock of Comstock. Such shares are now included on the balance sheet under “Investment in marketable securities”.
| Type | December 31, 2016 | June 30, 2016 | ||||||
| Private equity hedge fund, at cost | $ | 333,000 | $ | 333,000 | ||||
| Other preferred stock | 15,000 | 26,000 | ||||||
| $ | 348,000 | $ | 359,000 | |||||
NOTE 5 - 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).
- 10 -
The assets measured at fair value on a recurring basis are as follows:
| As of December 31, 2015 | ||||||||||||||||
| Assets: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Other investments - warrants | $ | - | $ | - | $ | 4,000 | $ | 4,000 | ||||||||
| Investment in marketable securities: | ||||||||||||||||
| Basic materials | 3,555,000 | - | - | 3,555,000 | ||||||||||||
| Other | 456,000 | - | - | 456,000 | ||||||||||||
| 4,011,000 | - | - | 4,011,000 | |||||||||||||
| $ | 4,011,000 | $ | - | $ | 4,000 | $ | 4,015,000 | |||||||||
| As of June 30, 2015 | ||||||||||||||||||||||||
| As of | 12/31/2016 | 6/30/2016 | ||||||||||||||||||||||
| Assets: | Level 1 | Level 2 | Level 3 | Total | Total - Level 1 | Total - Level 1 | ||||||||||||||||||
| Other investments - warrants | $ | - | $ | - | $ | 25,000 | $ | 25,000 | ||||||||||||||||
| Investment in marketable securities: | ||||||||||||||||||||||||
| Basic materials | 926,000 | - | - | 926,000 | $ | 2,388,000 | $ | 3,102,000 | ||||||||||||||||
| Energy | 684,000 | 388,000 | ||||||||||||||||||||||
| Financial services | 262,000 | 198,000 | ||||||||||||||||||||||
| Other | 375,000 | - | - | 375,000 | 469,000 | 350,000 | ||||||||||||||||||
| 1,301,000 | - | - | 1,301,000 | $ | 3,803,000 | $ | 4,038,000 | |||||||||||||||||
| $ | 1,301,000 | $ | - | $ | 25,000 | $ | 1,326,000 | |||||||||||||||||
The fair values of investments in marketable securities are determined by the most recently traded price of each security at the balance sheet date. The fair value of the warrants was determined based upon a Black-Scholes option valuation model.
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 or adjusted to record the fair value of new instruments received (i.e., preferred shares) in exchange for old instruments (i.e., debt instruments). 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 | ||||||||||||||||||||
| Assets | Level 1 | Level 2 | Level 3 | December 31, 2015 | ended December 31, 2015 | |||||||||||||||
| Other non-marketable investments | $ | - | $ | - | $ | 467,000 | $ | 467,000 | $ | (82,000 | ) | |||||||||
| Net loss for the six months | ||||||||||||||||||||
| Assets | Level 1 | Level 2 | Level 3 | June 30, 2015 | ended December 31, 2014 | |||||||||||||||
| Other non-marketable investments | $ | - | $ | - | $ | 4,978,000 | $ | 4,978,000 | $ | - | ||||||||||
| - 10 - |
| Net loss for the six months | ||||||||||||
| Assets | Level 3 | December 31, 2016 | ended December 31, 2016 | |||||||||
| Other non-marketable investments | $ | 348,000 | $ | 348,000 | $ | (11,000 | ) | |||||
| Net loss for the six months | ||||||||||||
| Assets | Level 3 | June 30, 2016 | ended December 31, 2015 | |||||||||
| Other non-marketable investments | $ | 359,000 | $ | 359,000 | $ | (82,000 | ) | |||||
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 6 - 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.
- 11 -
Information below represents reporting segments for the three and six months December 31, 2016 and 2015, and 2014, respectively. OperatingSegment 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 for the entire Company.
| As of and for the three months | Hotel | Investment | ||||||||||||||
| ended December 31, 2015 | Operations | Transactions | Other | Total | ||||||||||||
| Revenues | $ | 13,713,000 | $ | - | $ | - | $ | 13,713,000 | ||||||||
| Segment operating expenses | (11,969,000 | ) | - | (170,000 | ) | (12,139,000 | ) | |||||||||
| Segment income (loss) | 1,744,000 | - | (170,000 | ) | 1,574,000 | |||||||||||
| Interest expense - mortgage | (1,941,000 | ) | - | - | (1,941,000 | ) | ||||||||||
| Depreciation and amortization expense | (709,000 | ) | - | - | (709,000 | ) | ||||||||||
| Loss from investments | - | (1,999,000 | ) | - | (1,999,000 | ) | ||||||||||
| Income tax benefit | - | - | 1,225,000 | 1,225,000 | ||||||||||||
| Net income (loss) | $ | (906,000 | ) | $ | (1,999,000 | ) | $ | 1,055,000 | $ | (1,850,000 | ) | |||||
| Total assets | $ | 46,511,000 | $ | 4,482,000 | $ | 10,471,000 | $ | 61,464,000 | ||||||||
| As of and for the three months | Hotel | Investment | ||||||||||||||
| ended December 31, 2014 | Operations | Transactions | Other | Total | ||||||||||||
| Revenues | $ | 14,044,000 | $ | - | $ | - | $ | 14,044,000 | ||||||||
| Segment operating expenses | (12,033,000 | ) | - | (157,000 | ) | (12,190,000 | ) | |||||||||
| Segment income (loss) | 2,011,000 | - | (157,000 | ) | 1,854,000 | |||||||||||
| Interest expense - mortgage | (1,939,000 | ) | - | - | (1,939,000 | ) | ||||||||||
| Loss on disposal of assets | (51,000 | ) | - | - | (51,000 | ) | ||||||||||
| Depreciation and amortization expense | (664,000 | ) | - | - | (664,000 | ) | ||||||||||
| Loss from investments | - | (454,000 | ) | - | (454,000 | ) | ||||||||||
| Income tax benefit | - | - | 547,000 | 547,000 | ||||||||||||
| Net income (loss) | $ | (643,000 | ) | $ | (454,000 | ) | $ | 390,000 | $ | (707,000 | ) | |||||
| Total assets | $ | 44,307,000 | $ | 7,335,000 | $ | 9,096,000 | $ | 60,738,000 | ||||||||
| As of and for the six months | Hotel | Investment | ||||||||||||||
| ended December 31, 2015 | Operations | Transactions | Other | Total | ||||||||||||
| Revenues | $ | 28,851,000 | $ | - | $ | - | $ | 28,851,000 | ||||||||
| Segment operating expenses | (23,162,000 | ) | - | (373,000 | ) | (23,535,000 | ) | |||||||||
| Segment income (loss) | 5,689,000 | - | (373,000 | ) | 5,316,000 | |||||||||||
| Interest expense - mortgage | (3,882,000 | ) | - | - | (3,882,000 | ) | ||||||||||
| Loss on disposal of assets | (30,000 | ) | - | - | (30,000 | ) | ||||||||||
| Depreciation and amortization expense | (1,422,000 | ) | - | - | (1,422,000 | ) | ||||||||||
| Loss from investments | - | (1,944,000 | ) | - | (1,944,000 | ) | ||||||||||
| Income tax benefit | - | - | 782,000 | 782,000 | ||||||||||||
| Net income (loss) | $ | 355,000 | $ | (1,944,000 | ) | $ | 409,000 | $ | (1,180,000 | ) | ||||||
| Total assets | $ | 46,511,000 | $ | 4,482,000 | $ | 10,471,000 | $ | 61,464,000 | ||||||||
| As of and for the six months | Hotel | Investment | ||||||||||||||
| ended December 31, 2014 | Operations | Transactions | Other | Total | ||||||||||||
| Revenues | $ | 28,874,000 | $ | - | $ | - | $ | 28,874,000 | ||||||||
| Segment operating expenses | (23,871,000 | ) | - | (345,000 | ) | (24,216,000 | ) | |||||||||
| Segment income (loss) | 5,003,000 | - | (345,000 | ) | 4,658,000 | |||||||||||
| Interest expense - mortgage | (3,963,000 | ) | - | - | (3,963,000 | ) | ||||||||||
| Loss on disposal of assets | (51,000 | ) | - | - | (51,000 | ) | ||||||||||
| Depreciation and amortization expense | (1,306,000 | ) | - | - | (1,306,000 | ) | ||||||||||
| Loss from investments | - | (1,046,000 | ) | - | (1,046,000 | ) | ||||||||||
| Income tax benefit | - | - | 729,000 | 729,000 | ||||||||||||
| Net income (loss) | $ | (317,000 | ) | $ | (1,046,000 | ) | $ | 384,000 | $ | (979,000 | ) | |||||
| Total assets | $ | 44,307,000 | $ | 7,335,000 | $ | 9,096,000 | $ | 60,738,000 | ||||||||
- 12 -
| - 11 - |
| As of and for the three months | Hotel | Investment | ||||||||||||||
| ended December 30, 2016 | Operations | Transactions | Corporate | Total | ||||||||||||
| Revenues | $ | 12,837,000 | $ | - | $ | - | $ | 12,837,000 | ||||||||
| Segment operating expenses | (9,926,000 | ) | - | (144,000 | ) | (10,070,000 | ) | |||||||||
| Segment income (loss) | 2,911,000 | - | (144,000 | ) | 2,767,000 | |||||||||||
| Interest expense - mortgage | (1,909,000 | ) | - | - | (1,909,000 | ) | ||||||||||
| Depreciation and amortization expense | (760,000 | ) | - | - | (760,000 | ) | ||||||||||
| Loss from investments | - | (1,037,000 | ) | - | (1,037,000 | ) | ||||||||||
| Income tax benefit | - | - | 377,000 | 377,000 | ||||||||||||
| Net income (loss) | $ | 242,000 | $ | (1,037,000 | ) | $ | 233,000 | $ | (562,000 | ) | ||||||
| Total assets | $ | 41,586,000 | $ | 4,151,000 | $ | 12,927,000 | $ | 58,664,000 | ||||||||
| As of and for the three months | Hotel | Investment | ||||||||||||||
| ended December 30, 2015 | Operations | Transactions | Corporate | Total | ||||||||||||
| Revenues | $ | 13,713,000 | $ | - | $ | - | $ | 13,713,000 | ||||||||
| Segment operating expenses | (11,969,000 | ) | - | (170,000 | ) | (12,139,000 | ) | |||||||||
| Segment income (loss) | 1,744,000 | - | (170,000 | ) | 1,574,000 | |||||||||||
| Interest expense - mortgage | (1,941,000 | ) | - | - | (1,941,000 | ) | ||||||||||
| Depreciation and amortization expense | (709,000 | ) | - | - | (709,000 | ) | ||||||||||
| Loss from investments | - | (1,999,000 | ) | - | (1,999,000 | ) | ||||||||||
| Incomt tax benefit | - | - | 1,225,000 | 1,225,000 | ||||||||||||
| Net income (loss) | $ | (906,000 | ) | $ | (1,999,000 | ) | $ | 1,055,000 | $ | (1,850,000 | ) | |||||
| As of and for the six months | Hotel | Investment | ||||||||||||||
| ended December 30, 2016 | Operations | Transactions | Corporate | Total | ||||||||||||
| Revenues | $ | 27,442,000 | $ | - | $ | - | $ | 27,442,000 | ||||||||
| Segment operating expenses | (20,182,000 | ) | - | (298,000 | ) | (20,480,000 | ) | |||||||||
| Segment income (loss) | 7,260,000 | - | (298,000 | ) | 6,962,000 | |||||||||||
| Interest expense - mortgage | (3,897,000 | ) | - | - | (3,897,000 | ) | ||||||||||
| Depreciation and amortization expense | (1,424,000 | ) | - | - | (1,424,000 | ) | ||||||||||
| Loss from investments | - | (803,000 | ) | - | (803,000 | ) | ||||||||||
| Income tax expense | - | - | (328,000 | ) | (328,000 | ) | ||||||||||
| Net income (loss) | $ | 1,939,000 | $ | (803,000 | ) | $ | (626,000 | ) | $ | 510,000 | ||||||
| Total assets | $ | 41,586,000 | $ | 4,151,000 | $ | 12,927,000 | $ | 58,664,000 | ||||||||
| As of and for the six months | Hotel | Investment | ||||||||||||||
| ended December 30, 2015 | Operations | Transactions | Corporate | Total | ||||||||||||
| Revenues | $ | 28,851,000 | $ | - | $ | - | $ | 28,851,000 | ||||||||
| Segment operating expenses | (23,162,000 | ) | - | (373,000 | ) | (23,535,000 | ) | |||||||||
| Segment income (loss) | 5,689,000 | - | (373,000 | ) | 5,316,000 | |||||||||||
| Interest expense - mortgage | (3,882,000 | ) | - | - | (3,882,000 | ) | ||||||||||
| Loss on disposal of assets | (30,000 | ) | - | - | (30,000 | ) | ||||||||||
| Depreciation and amortization expense | (1,422,000 | ) | - | - | (1,422,000 | ) | ||||||||||
| Loss from investments | - | (1,944,000 | ) | - | (1,944,000 | ) | ||||||||||
| Incomt tax benefit | - | - | 782,000 | 782,000 | ||||||||||||
| Net income (loss) | $ | 355,000 | $ | (1,944,000 | ) | $ | 409,000 | $ | (1,180,000 | ) | ||||||
NOTE 7 - RELATED PARTY TRANSACTIONS
Certain shared costs and expenses, primarily administrative expenses, rent and insurance are allocated amongOn July 2, 2014, the Company,Partnership obtained from InterGroup (a related party) 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 proceeds of the loan were applied to the July 2014 payments to Holdings as described in Note 2 of the Company’s parent, Santa Fe andJune 30, 2016 10-K Report. The loan was extended to June 30, 2017. InterGroup is currently working on amending the parent of Santa Fe, based on management's estimate ofloan agreement to extend the pro rata utilization of resources. For the three and six months ended December 31, 2015 and 2014, these expenses were approximately $18,000 and $36,000,loan for each respectivea longer period.
During the three months ended December 31, 2015 and 2014, the Company receivedJustice has an outstanding accounts payable balance to Intergroup for approximately $316,000 for management fees related to the management of the Hotel from Justice Investors totaling $137,000 and $140,000, respectively. During the six months endedJune to December 31, 2015 and 2014, the Company received management fees from Justice Investors totaling $300,000 and $281,000, respectively.
These fees are eliminated in consolidation.of 2016.
| - 12 - |
In connection with the redemption of limited partnership interests of Justice Investors, Limited Partnership (which took place during fiscal year ended June 30, 2014), Justice Operating Company, LLC agreed to pay a total of $1,550,000 in fees to certain officers and directors of the Company for services rendered in connection with the redemption of partnership interests, refinancing of Justice’s properties and reorganization of Justice Investors. This agreement was superseded by a letter dated December 11, 2013 from Justice Investors, Limited Partnership, in which Justice Investors Limited Partnership assumed the payment obligations of Justice Operating Company, LLC. The first payment under this agreement was made concurrently with the closing of the loan agreements, with the remaining payments due upon Justice Investor’s having adequate available cash as described in the letter. As of December 31, 2015, $400,000 of these fees remain outstanding.
Four of the Portsmouth directors serve as directors of Intergroup.InterGroup. Three of those directors also serve as directors of Santa Fe. The three Santa Fe directors also serve as directors of InterGroup.
John V. Winfield serves as Chief Executive Officer and Chairman of the Company, Santa Fe, and InterGroup. 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.
- 13 -NOTE 8 – SUBSEQUENT EVENT
After a lengthy review process of several national third party hotel management companies, on February 1, 2017, Justice entered into a management agreement with Interstate Management Company, LLC (“Interstate”) to manage the Hotel with an effective takeover date of February 3, 2017. The term of 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 the aggregate subject to certain conditions.
We are involved from time to time in legal proceedings of types regarded as common in our business, including administrative or judicial proceedings, such as employment or labor disputes, breach of contract liability and premises liability litigation. Where appropriate, we may establish financial reserves for such proceedings. We also maintain insurance to mitigate certain of such risks.
On May 5, 2016, Justice Investors and Portsmouth (parent Company) entered into a settlement agreement with Evon and Holdings. Under this settlement agreement, the Partnership agreed to pay Evon Corporation $5,575,000 no later than January 10, 2017. As of January 17, 2017, all conditions of the settlement agreement have been satisfied by the Company.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND PROJECTIONS
The Company may from time to time make forward-looking statements and projections concerning future expectations. When used in this discussion, the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “may,” “could,” “might” and similar expressions, are intended to identify forward-looking statements. These statements are subject to certain risks and uncertainties, such as national and worldwide economic conditions, including the impact of recessionary conditions on tourism, travel and the lodging industry, the impact of terrorism and war on the national and international economies, including tourism and securities markets, energy and fuel costs, natural disasters, general economic conditions and competition in the hotel industry in the San Francisco area, seasonality, labor relations and labor disruptions, actual and threatened pandemics such as swine flu, partnership distributions, the ability to obtain financing at favorable interest rates and terms, securities markets, regulatory factors, litigation and other factors discussed below in this Report and in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015,2016, that could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as to the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
| - 13 - |
RESULTS OF OPERATIONS
The Company's principal business is conducted through its general and limited partnership interest in the Justice Investors limited partnershipLimited Partnership (“Justice” or the “Partnership”). Justice owns a 543 room hotel property located at 750 Kearny Street, San Francisco, California 94108, known as the “Hilton San Francisco Financial District” (the “Hotel” or the “Property”) and related facilities, including a five-level underground parking garage. The financial statements of Justice have been consolidated with those of the Company.
The Hotel is operated by the Partnership as a full service Hilton brand hotel pursuant to a Franchise License Agreement (the “License Agreement”) with HLT Franchise Holding LLC (Hilton). The Partnership entered into a Franchisethe License Agreement with the HLT Franchise Holding LLC (Hilton) on December 10, 2004. The term of the License Agreement was for an initial period of 15 years commencing on the opening date, with an option to extend the License Agreement for another five years, subject to certain conditions. On June 26, 2015, the Partnership and Hilton entered into an amended franchise agreement which extended the License Agreement through 2030, modified the monthly royalty rate, extended geographic protection to the Partnership and also provided the Partnership certain key money cash incentives to be earned through 2030. The key money cash incentives were received on July 1, 2015.
Justice also has a Management Agreementmanagement agreement with Prism Hospitality L.P. (“Prism”) to perform certain management functions for the Hotel. The management agreement with Prism had an original term of ten years and can be terminated at any time with or without cause by the Partnership owner.Partnership. Effective January 2014, the management agreement with Prism was amended by the Partnership.Partnership to change the nature of the services provided by Prism and the compensation payable to Prism, among other things. Effective December 1, 2013, GMP Management, Inc. (“GMP”), a company owned by a Justice limited partner and a related party, also providesbegan to provide management services for the Partnership pursuant to a Management Services Agreement, which is formanagement services agreement with a term of 3three years, but which can be terminatedsubject to the Partnership’s right to terminate earlier, by the Partnership for cause. In June 2016, GMP resigned. After a lengthy review process of several national third party hotel management companies, on February 1, 2017, Justice entered into a management agreement with Interstate Management Company, LLC (“Interstate”) to manage the Hotel with an effective takeover date of February 3, 2017. The term of 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 the aggregate subject to certain conditions.
The parking garage that is part of the Hotel property iswas managed by Ace Parking pursuant to a contract with the Partnership. Portsmouth also receives management fees as a general partnerThe contract was terminated with an effective termination date of Justice for its services in overseeing andOctober 4, 2016. The Company began managing the Partnership’s assets. Those fees are eliminated in consolidation.parking garage in-house after the termination of Ace Parking.
Three Months Ended December 31, 20152016 Compared to Three Months Ended December 31, 20142015
The Company had a net loss of $562,000 for the three months ended December 31, 2016 compared to net loss of $1,850,000 for the three months ended December 31, 2015 compared to a net loss of $707,000 for the three months ended December 31, 2014.2015. The increasedecrease in the net loss is primarily attributable to the higher net loss on marketable securities asincome from the result ofHotel operations and the decrease in the market value of the Company’s holdings in common stock of Comstock Mining, Inc.investment related losses.
Hotel Operations
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The Company hadNet income from Hotel operations was $242,000 for the three months ended December 31, 2016 compared to a net loss from hotel operations of $906,000 for the three months ended December 31, 2015, compared2015. The change is primarily due to a net lossthe reduction of $643,000 forexpenses as the three months ended December 31, 2014. Hotel revenues decreased duringresult of the current quarter, while operating expenses also decreased by a lower percentage relative toresignation of GMP management in June 2016 and the decrease in legal expenses as the result of the legal settlement that was reached in May 2016. Please see Note 17 of the Company’s June 30, 2016 10-K report for further information. The decrease in operating expenses was partially offset by the decrease in total Hotel revenues.
| - 14 - |
The following table sets forth a more detailed presentation of Hotel operations for the three months ended December 31, 20152016 and 2014.2015.
| For the three months ended December 31, | 2015 | 2014 | 2016 | 2015 | ||||||||||||
| Hotel revenues: | ||||||||||||||||
| Hotel rooms | $ | 10,796,000 | $ | 10,916,000 | $ | 10,497,000 | $ | 10,796,000 | ||||||||
| Food and beverage | 1,858,000 | 2,073,000 | 1,506,000 | 1,858,000 | ||||||||||||
| Garage | 674,000 | 721,000 | 643,000 | 674,000 | ||||||||||||
| Other operating departments | 385,000 | 334,000 | 191,000 | 385,000 | ||||||||||||
| Total hotel revenues | 13,713,000 | 14,044,000 | 12,837,000 | 13,713,000 | ||||||||||||
| Operating expenses, excluding loss on disposal of assets, depreciation and amortization | (11,969,000 | ) | (12,033,000 | ) | ||||||||||||
| Operating income before loss on disposal of assets, interest and depreciation and amortization | 1,744,000 | 2,011,000 | ||||||||||||||
| Loss on disposal of assets | - | (51,000 | ) | |||||||||||||
| Operating expenses excluding depreciation and amortization | (9,926,000 | ) | (11,969,000 | ) | ||||||||||||
| Operating income before interest, depreciation and amortization | 2,911,000 | 1,744,000 | ||||||||||||||
| Interest expense - mortgage | (1,941,000 | ) | (1,939,000 | ) | (1,909,000 | ) | (1,941,000 | ) | ||||||||
| Depreciation and amortization expense | (709,000 | ) | (664,000 | ) | (760,000 | ) | (709,000 | ) | ||||||||
| Net income from Hotel operations | $ | (906,000 | ) | $ | (643,000 | ) | ||||||||||
| Net income (loss) from Hotel operations | $ | 242,000 | $ | (906,000 | ) | |||||||||||
For the three months ended December 31, 2015,2016, the Hotel generatedhad operating income of $2,911,000 before interest, depreciation and amortization on total operating revenues of $12,837,000 compared to operating income of $1,744,000 before the loss on disposal of assets and interest, and depreciation and amortization on total operating revenues of $13,713,000 compared to operating income of $2,011,000 before the loss on disposal of assets and interest and depreciation and amortization on total operating revenues of $14,044,000 for the three months ended December 31, 2014.2015. Room revenues decreased by $120,000$299,000 for the three months ended December 31, 20152016 compared to the three months ended December 31, 20142015 primarily as the result of the decrease in group stays.business and the decrease in the average daily rate. Food and beverage revenue also decreased by $215,000$352,000 as the result of lowerthe reduction in the catering and banquet services from groups.the decrease in the group business.
Total operating expenses remained consistent withdecreased by $2,043,000 this quarter as compared to the priorprevious comparable period. However,quarter primarily due to the Hotel did have a decrease in franchise fees andoperating expenses related to the resignation of GMP management, the reduction in legal expenses offset by increases in property taxes, repairs and maintenance expense and management fees. Franchise fees decreased as the result of the new Hilton franchise agreement. Legalefforts to reduce operating expenses decreased as the result of coming closer to a settlement of the current litigation.in all areas.
The following table sets forth the average daily room rate, average occupancy percentage and room revenue per available room (“RevPAR”) of the Hotel for the three months ended December 31, 20152016 and 2014.2015.
| Three Months Ended December 31, | Average Daily Rate | Average Occupancy % |
RevPAR | |||||||||
| 2015 | $ | 243 | 89 | % | $ | 216 | ||||||
| 2014 | $ | 245 | 89 | % | $ | 218 | ||||||
Three Months Ended December 31, | Average Daily Rate | Average Occupancy % |
RevPAR | |||||||||||
| 2016 | $ | 236 | 89 | % | $ | 210 | ||||||||
| 2015 | $ | 243 | 89 | % | $ | 216 | ||||||||
The Hotel’s total revenues decreased by 2.4%6.4% this quarter as compared to the previous comparable quarter. Average daily rate decreased by $7 and RevPAR decreased by $2$6 for the three months ended December 31, 20152016 compared to the three months ended December 31, 2014.2015. Average occupancy remained consistent with the prior comparable quarter.
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Our highest priority is guest satisfaction. We believe that enhancing the guest experience differentiates the Hotel from our competition byand is critical to the Hotel’s objective of building the most sustainable guest loyalty program. The Hotel's loyalty score improved by five percentage points year-over-year and our overall service score by four percentage points. We attribute this improvementloyalty. In order to continuedmake a large impact on guest experience, the Hotel will continue training of team members on Hilton brand standards and guest satisfaction, hiring and retaining talents in key operations and enhancing the arrival experience. In addition, the Hotel replaced the carpet flooring in the lobby and the fourth floor with oak wood, creating an open and welcoming environment; modernized the furniture in the lobby, the porte cochere, and the second floor; and replaced the third floor carpets and doors. The Wellness Center on the fifth floor features a new spa with two treatment rooms and a room for manicuremanicures and pedicure which has been doing well. The fitness center has been expanded with state ofpedicures. During the art equipment.
In order to further enhance the guest experience,fiscal year ended June 30, 2016, the Hotel plans to renovatepartially remodeled 14 floors of guest rooms by updating the fourth floor meeting rooms to make a state of the art meeting space and, concurrently, to renovate the fourth floor bathrooms. The hotel will remodel guest room bathrooms with modern shower amenities, and update desk tables and the night stands with granite tops for a sleek and modern look. As the Hotel continues to further develop its ties with the financial district community and the City of San Francisco, the Hotel is also committed to promoting innovative business ideas and good corporate citizenship.
| - 15 - |
With the high demand in guest rooms, the Hotel can focus more attention on length and patterns of stay that benefit the Hotel. The Hotel is also looking into converting the carpet in the rooms to hardwood floors. Finally,focusing on high end clients with more banquet and meeting room requirements. Moving forward, the Hotel in conjunction withwill continue to focus on cultivating international business and capturing a greater percentage of the Chinese Cultural Center, is developing a landscape area on the Pedestrian Bridge that connectshigher rated business, leisure and group travel. The Hotel will continue to explore new and innovative ways to differentiate the Hotel from its competition, as well as focusing on returning our food and beverage operations to Portsmouth Square. We continueprofitability. However, like all hotels, it will remain subject to take steps that further developthe uncertain domestic and global economic environment and other risk factors beyond our ties withcontrol, such as the local Chinese communityeffect of natural disasters and the city of San Francisco, representing good corporate citizenship and promoting important, newadverse business opportunities.conditions.
Investment Transactions
The Company had a net loss on marketable securities of $997,000 for the three months ended December 31, 2016 compared to a net loss on marketable securities of $1,878,000 for the three months ended December 31, 2015 compared to a net loss on marketable securities of $554,000 for2015. For the three months ended December 31, 2014. Approximately2016, approximately $978,000 of the $997,000 net loss is related to the Company’s investment in the common stock of Comstock Mining, Inc. (Comstock). For the comparative three months ended December 31, 2015, approximately $1,855,000 of the $1,878,000 net loss is related to the Company’s investment in the common stock of Comstock. Such investments represent approximately 88% ofFor the Company’s portfolio as ofthree months ended December 31, 2015.2016, the Company had a net realized loss of $13,000 and a net unrealized loss of $984,000. For the three months ended December 31, 2015, the Company had a net unrealized loss of $1,878,000. For the three months ended December 31, 2014, the Company had a net realized gain of $13,000 and a net unrealized loss of $567,000. Gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a significant impact on the Company’s results of operations. However, the amount of gain or loss on marketable securities for any given period may have no predictive value and variations in amount from period to period may have no analytical value. For a more detailed description of the composition of the Company’s marketable securities see the Marketable Securities section below.
During the three months ended December 31, 2015 and 2014, the Company performed an impairment analysis of its other investments and determined that its investments had an other than temporary impairment and recorded impairment losses of $82,000 in the current quarter. There were no such losses in the prior year comparable period.
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 during the three months ended December 31, 20152016 and 20142015 represents the income tax effect on the Company’s pretax loss which includes its share in the net lossincome(loss) of the Hotel.
Six Months Ended December 31, 20152016 Compared to Six Months Ended December 31, 20142015
The Company had anet income of $510,000 for the six months ended December 31, 2016 compared to net loss of $1,180,000 for the six months ended December 31, 2015 compared2015. The change is primarily attributable to a net loss of $979,000the higher income from the Hotel operations and the decrease in investment related losses.
Hotel Operations
Net income from Hotel operations was $1,939,000 for the six months ended December 31, 2014. The increase in the2016 compared to net loss is primarily attributable to the higher net loss on marketable securities as the result of the decrease in the market value of the Company’s holdings in common stock of Comstock Mining, Inc., partially offset by the higher income from Hotel operations.
The Company had net income from hotel operations of $355,000 for the six months ended December 31, 2015 compared to a net loss of $317,000 for the six months ended December 31, 2014. Hotel revenues remained relatively consistent for the six months ended December 31, 2015 compared2015. The change is primarily due to the same periodreduction of expenses as the result of the resignation of GMP management in June 2016, the prior year whiledecrease in legal expenses as the result of the legal settlement that was reached in May 2016 and management’s efforts to reduce operating expenses. The decrease in operating expenses decreased.was partially offset by the decrease in total Hotel revenues.
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The following table sets forth a more detailed presentation of Hotel operations for the six months ended December 31, 20152016 and 2014.2015.
| For the six months ended December 31, | 2015 | 2014 | ||||||
| Hotel revenues: | ||||||||
| Hotel rooms | $ | 23,403,000 | $ | 23,260,000 | ||||
| Food and beverage | 3,508,000 | 3,646,000 | ||||||
| Garage | 1,359,000 | 1,418,000 | ||||||
| Other operating departments | 581,000 | 550,000 | ||||||
| Total hotel revenues | 28,851,000 | 28,874,000 | ||||||
| Operating expenses, excluding loss on disposal of assets, depreciation and amortization | (23,162,000 | ) | (23,871,000 | ) | ||||
| Operating income before loss on disposal of assets, interest and depreciation and amortization | 5,689,000 | 5,003,000 | ||||||
| Loss on disposal of assets | (30,000 | ) | (51,000 | ) | ||||
| Interest expense - mortgage | (3,882,000 | ) | (3,963,000 | ) | ||||
| Depreciation and amortization expense | (1,422,000 | ) | (1,306,000 | ) | ||||
| Net income (loss) from Hotel operations | $ | 355,000 | $ | (317,000 | ) | |||
| - 16 - |
| For the six months ended December 31, | 2016 | 2015 | ||||||
| Hotel revenues: | ||||||||
| Hotel rooms | $ | 22,795,000 | $ | 23,403,000 | ||||
| Food and beverage | 2,955,000 | 3,508,000 | ||||||
| Garage | 1,324,000 | 1,359,000 | ||||||
| Other operating departments | 368,000 | 581,000 | ||||||
| Total hotel revenues | 27,442,000 | 28,851,000 | ||||||
| Operating expenses excluding depreciation and amortization | (20,182,000 | ) | (23,162,000 | ) | ||||
| Operating income before loss on disposal of assets, interest, depreciation and amortization | 7,260,000 | 5,689,000 | ||||||
| Loss on disposal of assets | - | (30,000 | ) | |||||
| Interest expense - mortgage | (3,897,000 | ) | (3,882,000 | ) | ||||
| Depreciation and amortization expense | (1,424,000 | ) | (1,422,000 | ) | ||||
| Net income from Hotel operations | $ | 1,939,000 | $ | 355,000 | ||||
For the six months ended December 31, 2015,2016, the Hotel generatedhad operating income of $7,260,000 before loss on disposal of assets, interest, depreciation and amortization on total operating revenues of $27,442,000 compared to operating income of $5,689,000 before the loss on disposal of assets, and interest, and depreciation and amortization on total operating revenues of $28,851,000 compared to operating income of $5,003,000 before the loss on disposal of assets and interest and depreciation and amortization on total operating revenues of $28,874,000 for the six months ended December 31, 2014.2015. Room revenues increaseddecreased by $143,000$608,000 for the six months ended December 31, 20152016 compared to the six months ended December 31, 20142015 primarily as the result of the higher revenue from groups.decrease in group business and the decrease in the average daily rate. Food and beverage revenue decreased by $138,000$553,000 as the result of lowerthe reduction in the catering and banquet services from groups.the decrease in the group business.
OperatingTotal operating expenses decreased by $709,000$2,980,000 this for the six months ended December 31, 2016 as compared to the prior comparable periodsix months ended December 31, 2015 primarily due to reduced royalty fees per the new Hilton franchise agreement and the decrease in operating expenses related to the resignation of GMP management, the reduction in legal expenses as the result of coming closerand management efforts to a settlement of the current litigation.reduce operating expenses in all areas.
The following table sets forth the average daily room rate, average occupancy percentage and room revenue per available room (“RevPAR”) of the Hotel for the six months ended December 31, 20152016 and 2014.2015.
| Six Months Ended December 31, | Average Daily Rate | Average Occupancy % |
RevPAR | |||||||||
| 2015 | $ | 254 | 92 | % | $ | 234 | ||||||
| 2014 | $ | 252 | 93 | % | $ | 232 | ||||||
Six months Ended December 31, | Average Daily Rate | Average Occupancy % |
RevPAR | |||||||||||
| 2016 | $ | 245 | 93 | % | $ | 228 | ||||||||
| 2015 | $ | 254 | 92 | % | $ | 234 | ||||||||
The Hotel’s total revenues remained consistent with the previous comparable six months. Average daily rate and RevPAR increaseddecreased by $24.9% for the six months ended December 31, 20152016 as compared to the six months ended December 31, 2014. The increases were offset2015. Average daily rate decreased by $9 and RevPAR decreased by $6 for the decrease insix months ended December 31, 2016 compared to the averagesix months ended December 31, 2015. Average occupancy increased by 1%. during the six months ended December 31, 2016 versus the comparable period.
Our highest priority is guest satisfaction. We believe that enhancing the guest experience differentiates the Hotel from our competition byand is critical to the Hotel’s objective of building the most sustainable guest loyalty program. The Hotel's loyalty score improved by five percentage points year-over-year and our overall service score by four percentage points. We attribute this improvementloyalty. In order to continuedmake a large impact on guest experience, the Hotel will continue training of team members on Hilton brand standards and guest satisfaction, hiring and retaining talents in key operations and enhancing the arrival experience. In addition, the Hotel replaced the carpet flooring in the lobby and the fourth floor with oak wood, creating an open and welcoming environment; modernized the furniture in the lobby, the porte cochere, and the second floor; and replaced the third floor carpets and doors. The Wellness Center on the fifth floor features a new spa with two treatment rooms and a room for manicuremanicures and pedicure which has been doing well. The fitness center has been expanded with state ofpedicures. During the art equipment.
In order to further enhance the guest experience,fiscal year ended June 30, 2016, the Hotel plans to renovatepartially remodeled 14 floors of guest rooms by updating the fourth floor meeting rooms to make a state of the art meeting space and, concurrently, to renovate the fourth floor bathrooms. The hotel will remodel guest room bathrooms with modern shower amenities, and update desk tables and the night stands with granite tops for a sleek and modern look. TheAs the Hotel continues to further develop its ties with the financial district community and the City of San Francisco, the Hotel is also looking into converting the carpet in the roomscommitted to hardwood floors. Finally, the Hotel, in conjunction with the Chinese Cultural Center, is developing a landscape area on the Pedestrian Bridge that connects the Hotel to Portsmouth Square. We continue to take steps that further develop our ties with the local Chinese communitypromoting innovative business ideas and the city of San Francisco, representing good corporate citizenship and promoting important, new business opportunities.citizenship.
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| - 17 - |
With the high demand in guest rooms, the Hotel can focus more attention on length and patterns of stay that benefit the Hotel. The Hotel is also focusing on high end clients with more banquet and meeting room requirements. Moving forward, the Hotel will continue to focus on cultivating international business and capturing a greater percentage of the higher rated business, leisure and group travel. The Hotel will continue to explore new and innovative ways to differentiate the Hotel from its competition, as well as focusing on returning our food and beverage operations to profitability. However, like all hotels, it will remain subject to the uncertain domestic and global economic environment and other risk factors beyond our control, such as the effect of natural disasters and adverse business conditions.
Investment Transactions
The Company had a net loss on marketable securities of $735,000 for the six months ended December 31, 2016 compared to a net loss on marketable securities of $1,774,000 for the six months ended December 31, 2015 compared to a net loss on marketable securities of $1,033,000 for2015. For the six months ended December 31, 2014. Approximately $1,716,000 of2016, the $1,774,000Company had a net loss isof approximately $800,000 related to the Company’s investment in the common stock of Comstock. Such investments representFor the comparative six months ended December 31, 2015, the Company had a net loss of approximately 88% of$1,716,000 related to the Company’s portfolio as ofinvestment in Comstock. For the six months ended December 31, 2015.2016, the Company had a net realized gain of $38,000 and a net unrealized loss of $773,000. For the six months ended December 31, 2015, the Company had a net realized loss of $25,00025,000 and a net unrealized loss of $1,749,000. For the six months ended December 31, 2014, the Company had a net realized gain of $56,000 and a net unrealized loss of $1,089,000. Gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a significant impact on the Company’s results of operations. However, the amount of gain or loss on marketable securities for any given period may have no predictive value and variations in amount from period to period may have no analytical value. For a more detailed description of the composition of the Company’s marketable securities see the Marketable Securities section below.
During the six months ended December 31, 2015 and 2014, the Company performed an impairment analysis of its other investments and determined that its investments had an other than temporary impairment and recorded impairment losses of $82,000 in the current period. There were no such losses in the prior year comparable period.
The Company consolidates Justice (Hotel) for financial reporting purposes and is not taxed on its non-controlling interest in the Hotel. The income tax (expense)benefit during the six months ended December 31, 20152016 and 20142015 represents the income tax effect on the Company’s pretax lossincome(loss) which includes its share in the net income(loss)income of the Hotel.
MARKETABLE SECURITIES
As of December 31, 2015 and June 30, 2015, the Company had investments in marketable equity securities of $4,011,000 and $1,301,000, respectively. The following table shows the composition of the Company’s marketable securities portfolio by selected industry groups as:
| As of December 31, 2015 | % of Total | |||||||
| Investment | ||||||||
| Industry Group | Fair Value | Securities | ||||||
| Basic materials | $ | 3,555,000 | 88.6 | % | ||||
| Other | 456,000 | 11.4 | % | |||||
| $ | 4,011,000 | 100.0 | % | |||||
| As of June 30, 2015 | % of Total | |||||||
| Investment | ||||||||
| Industry Group | Fair Value | Securities | ||||||
| Basic materials | $ | 926,000 | 71.2 | % | ||||
| Other | 375,000 | 28.8 | % | |||||
| $ | 1,301,000 | 100.0 | % | |||||
The Company’s investment in marketable securities portfolio consists primarily of (88.6%) of the common stock of Comstock Mining, Inc. (“Comstock” - NYSE MKT: LODE) which is included in the basic materials industry group. The significant increase in the Company’s investment in Comstock was due to the conversion of the $4,410,000 (4,410 preferred shares) held in Comstock Mining, Inc. (“Comstock” – OTCBB: LODE) 7 1/2% Series A-1 Convertible Preferred Stock (the “A-1 Preferred”) to common stock on August 27, 2015. The A-1 Preferred was previously included in other investments prior to its conversion.
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Marketable securities are stated at fair value as determined by the most recently traded price of each security at the balance sheet date.
FINANCIAL CONDITION AND LIQUIDITY
The Company’s cash flows are primarily generated from its Hotel operations, and general partner management fees and limited partnership distributions from the Partnership.operations. The Company also receives cash generated from the investment of its cash and marketable securities and other investments.
On December 18, 2013, the Partnership completed an Offer to Redeem any and all limited partnership interests not held by Portsmouth. As a result, Portsmouth, which prior to the Offer to Redeem owned 50% of the then outstanding limited partnership interests now controls approximately 93% of the voting interest in Justice and is now its sole General Partner.
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. The mortgage loan is secured by the Partnership’s principal asset, the Hotel. The mortgage loan initially bears an interest rate of 5.28%5.275% per annum and matureswith interest only payments due thru January 2017. Beginning in February 2017, the loan will begin to amortize over a thirty year period thru its maturity date of January 2024. As additional security for the mortgage loan, there is a limited guaranty executed by the Company in favor of mortgage lender. The mezzanine loan is a secured by the Operating membership interest held by Mezzanine and is subordinated to the Mortgage Loan. The mezzanine interest only loan initially bears interest at 9.75% per annum and matures in January 2024. As additional security for the mezzanine loan, there is a limited guaranty executed by the Company in favor of mezzanine lender.
On July 2, 2014, the Partnership obtained from the Intergroup Corporation (parent company of Portsmouth)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. IntergroupInterGroup received a 3% loan fee. The loan may be prepaid at any time without penalty. The proceeds of the loan were applied to the July 2014 payments to Holdings as described in Note 2 of the Company’s Annual Report on Form 10-K for the year ended June 30, 2015.2016 10-K Report. The loan was extended to June 30, 2017. InterGroup is currently working on amending the loan agreement to extend the loan for a longer period.
| - 18 - |
Despite an uncertain economy, the Hotel has continued to generate strong revenue growth.positive operating income. While the debt service requirements related the new loans and the ongoing legal dispute with some of the former Justice partners, may create some additional risk for the Company and its ability to generate cash flows in the future, management believes that cash flows from the operations of the Hotel and the garage will continue to be sufficient to meet all of the Partnership’s current and future obligations and financial requirements. Management also believes that there is sufficient equity in the Hotel assets to support future borrowings, if necessary, to fund any new capital improvements and other requirements.
The Company has invested in short-term, income-producing instruments and in equity and debt securities when deemed appropriate. The Company's marketable securities are classified as trading with unrealized gains and losses recorded through the consolidated statements of operations.
Management believes that its cash, marketable securities, and the cash flows generated from those assets and from the partnership management fees, will be adequate to meet the Company’s current and future obligations. Additionally, management believes there is significant appreciated value in the Hotel property to support additional borrowings, if necessary.
MARKETABLE SECURITIES
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The following table shows the composition of the Company’s marketable securities portfolio as of December 31, 2016 and June 30, 2016 by selected industry groups.
| 12/31/2016 | 6/30/2016 | |||||||||||||||
| % of Total | % of Total | |||||||||||||||
| As of | Investment | Investment | ||||||||||||||
| Industry Group | Fair Value | Securities | Fair Value | Securities | ||||||||||||
| Basic materials | $ | 2,388,000 | 62.8 | % | $ | 3,102,000 | 76.8 | % | ||||||||
| Energy | 684,000 | 18.0 | % | 388,000 | 9.6 | % | ||||||||||
| Financial services | 262,000 | 6.9 | % | 198,000 | 4.9 | % | ||||||||||
| Other | 469,000 | 12.3 | % | 350,000 | 8.7 | % | ||||||||||
| $ | 3,803,000 | 100.0 | % | $ | 4,038,000 | 100.0 | % | |||||||||
As of December 31, 2016, the Company’s investment in marketable securities portfolio consists primarily of 61% of the common stock of Comstock which is included in the basic materials industry group.
MATERIAL CONTRACTUAL OBLIGATIONS
The following table provides a summary as of December 31, 2015,2016, the Company’s material financial obligations which also including interest payments.payments:
| 6 Months | Year | Year | Year | Year | 6 Months | Year | Year | Year | Year | |||||||||||||||||||||||||||||||||||||||||||||||
| Total | 2016 | 2017 | 2018 | 2019 | 2020 | Thereafter | Total | 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | |||||||||||||||||||||||||||||||||||||||||||
| Mortgage and subordinated notes payable | $ | 117,000,000 | $ | - | $ | 672,000 | $ | 1,398,000 | $ | 1,473,000 | $ | 1,553,000 | $ | 111,904,000 | ||||||||||||||||||||||||||||||||||||||||||
| Other notes payable | 8,893,000 | 428,000 | 4,822,000 | 408,000 | 362,000 | 362,000 | 2,511,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Mortgage notes payable | $ | 117,000,000 | $ | 672,000 | $ | 1,398,000 | $ | 1,473,000 | $ | 1,553,000 | $ | 1,637,000 | $ | 110,267,000 | ||||||||||||||||||||||||||||||||||||||||||
| Related party and other notes payable | 8,920,000 | 5,279,000 | 317,000 | 317,000 | 317,000 | 317,000 | 2,373,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Interest | 45,725,000 | 3,728,000 | 7,284,000 | 6,560,000 | 5,979,000 | 5,451,000 | 16,723,000 | 49,747,000 | 5,336,000 | 6,998,000 | 6,922,000 | 6,843,000 | 6,759,000 | 16,889,000 | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 171,618,000 | $ | 4,156,000 | $ | 12,778,000 | $ | 8,366,000 | $ | 7,814,000 | $ | 7,366,000 | $ | 131,138,000 | $ | 175,667,000 | $ | 11,287,000 | $ | 8,713,000 | $ | 8,712,000 | $ | 8,713,000 | $ | 8,713,000 | $ | 129,529,000 | ||||||||||||||||||||||||||||
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no material off balance sheet arrangements.
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IMPACT OF INFLATION
Hotel room rates are typically impacted by supply and demand factors, not inflation, since rental of a hotel room is usually for a limited number of nights. Room rates can be, and usually are, adjusted to account for inflationary cost increases. Since the Company has the power and ability to adjust hotel room rates on an ongoing basis,there should be minimal impact on partnership revenues due to inflation. Partnership revenues are also subject to interest rate risks, which may be influenced by inflation. For the two most recent fiscal years, the impact of inflation on the Company's income is not viewed by management as material.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Critical accounting policies are those that are most significant to the portrayal of our financial position and results of operations and require judgments by management in order to make estimates about the effect of matters that are inherently uncertain. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to the consolidation of our subsidiaries, to our revenues, allowances for bad debts, accruals, asset impairments, other investments, income taxes and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions. There have been no material changes to the Company’s critical accounting policies during the six months December 31, 2015.2016. Please refer to the Company’s Annual Report on Form 10-K for the year ended June 30, 20152016 for a summary of the critical accounting policies.
Item 4. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company’s management, with the participation of the Company’s Chief Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, the Chief Executive Officer and Principal Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed in this filing is accumulated and communicated to management and is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in the Company’s internal control over financial reporting during the last quarterly period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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OTHER INFORMATION
31.1 Certification of Principal Executive Officer of Periodic Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
31.2 Certification of Principal Financial Officer of Periodic Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350.
32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.1350
| XBRL Instance Document |
| 101.SCH | XBRL Taxonomy Extension Schema |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| PORTSMOUTH SQUARE, INC. | |||||
| (Registrant) | |||||
| Date: | February | by | /s/ John V. Winfield | ||
| John V. Winfield, President, | |||||
| Chairman of the Board and | |||||
| Chief Executive Officer | |||||
| Date: | February | ||||
| by | /s/ David | ||||
| David Nguyen, Treasurer | |||||
| and Controller | |||||
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