UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended March 31, September 30, 2023
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the transition period from _____________ to ____________________ to_________
Commission File Number:Numbesr 1-10324
THE INTERGROUP CORPORATION
(Exact name of registrant as specified in its charter)
| delaware | 13-3293645 | |
(State or other jurisdiction of | ||
| Incorporation or organization) |
Identification No.) |
1516 S. Bundy Dr., Suite 200, Los Angeles, California 90025
(Address of principal executive offices, including Zipoffices) (Zip Code)
(310) 889-2500
(Registrant’s Telephone Number,telephone number, including Area Code)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.
☒ Yes ☒☐ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
☒ Yes ☒☐ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.
| Large accelerated filer ☐ | Accelerated filer ☐ | |||
| Non-accelerated filer ☒ | Smaller reporting company ☒ | |||
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).:
☐ Yes ☐☒ No ☒
The number of shares outstanding of the registrant’s Common Stock, as of May 10, 2023, was 2,206,489.
Securities registered pursuant to Sectionsection 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common stock | INTG | NASDAQ CAPITAL MARKET |
The number of shares outstanding of registrant’s Common Stock, as of November 14, 2023 was .
TABLE OF CONTENTS
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PART I
FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
THE INTERGROUP CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, 2023 | June 30, 2022 | September 30, 2023 | ||||||||||||||
| (unaudited) | ||||||||||||||||
| Assets | ||||||||||||||||
| Investment in hotel, net | $ | 39,369,000 | $ | 37,267,000 | ||||||||||||
| As of | (unaudited) | June 30, 2023 | ||||||||||||||
| ASSETS | ||||||||||||||||
| Investment in Hotel, net | $ | 40,227,000 | $ | 40,318,000 | ||||||||||||
| Investment in real estate, net | 48,349,000 | 48,025,000 | 47,988,000 | 48,057,000 | ||||||||||||
| Investment in marketable securities | 16,967,000 | 11,049,000 | 13,590,000 | 18,345,000 | ||||||||||||
| Cash and cash equivalents | 6,670,000 | 14,367,000 | 6,686,000 | 5,960,000 | ||||||||||||
| Restricted cash | 6,429,000 | 8,982,000 | 6,073,000 | 6,914,000 | ||||||||||||
| Other assets, net | 3,482,000 | 2,744,000 | 4,204,000 | 2,764,000 | ||||||||||||
| Accounts receivable, net | 11,000 | — | ||||||||||||||
| Deferred tax assets, net | 3,612,000 | 3,612,000 | ||||||||||||||
| Due from securities broker | 776,000 | - | ||||||||||||||
| Total assets | $ | 124,889,000 | $ | 126,046,000 | $ | 119,544,000 | $ | 122,358,000 | ||||||||
| Liabilities and Shareholders’ Deficit | ||||||||||||||||
| Liabilities | ||||||||||||||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||||||||||
| Liabilities: | ||||||||||||||||
| Accounts payable and other liabilities - Hotel | 11,759,000 | 7,691,000 | $ | 10,718,000 | $ | 11,616,000 | ||||||||||
| Accounts payable and other liabilities | 923,000 | 2,715,000 | 5,265,000 | 2,574,000 | ||||||||||||
| Due to securities broker | 176,000 | 490,000 | - | 1,601,000 | ||||||||||||
| Obligations for securities sold | 657,000 | 449,000 | 737,000 | 1,416,000 | ||||||||||||
| 3,096,000 | 3,521,000 | |||||||||||||||
| Other notes payable | 2,813,000 | 2,954,000 | ||||||||||||||
| Deferred tax liability | 4,927,000 | 4,927,000 | ||||||||||||||
| Mortgage notes payable - Hotel, net | 107,500,000 | 108,747,000 | 106,896,000 | 107,117,000 | ||||||||||||
| Mortgage notes payable - real estate, net | 84,637,000 | 85,437,000 | 84,475,000 | 84,757,000 | ||||||||||||
| Total liabilities | 208,748,000 | 209,050,000 | 215,831,000 | 216,962,000 | ||||||||||||
| Shareholders’ deficit | ||||||||||||||||
| Preferred stock, $ par value, shares authorized, issued | — | — | ||||||||||||||
| Common stock, $ par value; shares authorized; and issued; and outstanding, respectively | 33,000 | 33,000 | ||||||||||||||
| Shareholders’ deficit: | ||||||||||||||||
| Preferred stock, $ par value, shares authorized; issued | - | - | ||||||||||||||
| Common stock, $ par value, shares authorized; and issued; and outstanding, respectively | 33,000 | 33,000 | ||||||||||||||
| Additional paid-in capital | 2,551,000 | 3,277,000 | 2,339,000 | 2,445,000 | ||||||||||||
| Accumulated deficit | (44,781,000 | ) | (46,116,000 | ) | (54,079,000 | ) | (52,835,000 | ) | ||||||||
| Treasury stock, at cost, and shares as of March 31, 2023 and June 30, 2022, respectively | (20,756,000 | ) | (19,324,000 | ) | ||||||||||||
| Treasury stock, at cost, and shares, respectively | (20,833,000 | ) | (20,794,000 | ) | ||||||||||||
| Total InterGroup shareholders’ deficit | (62,953,000 | ) | (62,130,000 | ) | (72,540,000 | ) | (71,151,000 | ) | ||||||||
| Noncontrolling interest | (20,906,000 | ) | (20,874,000 | ) | (23,747,000 | ) | (23,453,000 | ) | ||||||||
| Total shareholders’ deficit | (83,859,000 | ) | (83,004,000 | ) | (96,287,000 | ) | (94,604,000 | ) | ||||||||
| Total liabilities and shareholders’ deficit | $ | 124,889,000 | $ | 126,046,000 | $ | 119,544,000 | $ | 122,358,000 | ||||||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
THE INTERGROUP CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
| For the three months ended March 31, | 2023 | 2022 | ||||||
| Revenues: | ||||||||
| Hotel | $ | 10,430,000 | $ | 6,632,000 | ||||
| Rental income | 3,932,000 | 3,826,000 | ||||||
| Total revenues | 14,362,000 | 10,458,000 | ||||||
| Costs and operating expenses | ||||||||
| Hotel operating expenses | (8,413,000 | ) | (6,544,000 | ) | ||||
| Rental real estate operating expenses | (2,770,000 | ) | (2,270,000 | ) | ||||
| Depreciation and amortization expense | (1,380,000 | ) | (1,185,000 | ) | ||||
| General and administrative expenses | (836,000 | ) | (580,000 | ) | ||||
| Total costs and operating expenses | (13,399,000 | ) | (10,579,000 | ) | ||||
| Income (loss) from operations | 963,000 | (121,000 | ) | |||||
| Other income (expense) | ||||||||
| Interest expense - mortgage | (2,101,000 | ) | (2,188,000 | ) | ||||
| Net gain on marketable securities | 866,000 | 906,000 | ||||||
| Net loss on marketable securities - Comstock | ||||||||
| Gain on debt extinguishment | ||||||||
| Gain on insurance recovery | ||||||||
| Impairment loss on other investments | ||||||||
| Dividend and interest income | 72,000 | 158,000 | ||||||
| Trading and margin interest expense | (473,000 | ) | (339,000 | ) | ||||
| Total other expense, net | (1,636,000 | ) | (1,463,000 | ) | ||||
| Loss before income taxes | (673,000 | ) | (1,584,000 | ) | ||||
| Income tax benefit | 59,000 | 711,000 | ||||||
| Net loss | (614,000 | ) | (873,000 | ) | ||||
| Less: Net loss attributable to the noncontrolling interest | 258,000 | 407,000 | ||||||
| Net loss attributable to InterGroup Corporation | $ | (356,000 | ) | $ | (466,000 | ) | ||
| Net loss per share attributable to InterGroup Corporation | ||||||||
| Basic | $ | (0.16 | ) | $ | (0.21 | ) | ||
| Diluted | - | - | ||||||
| Weighted average number of basic common shares outstanding | 2,211,066 | 2,230,872 | ||||||
| Weighted average number of diluted common shares outstanding | - | - | ||||||
(unaudited)
| For the three months ended September 30, | 2023 | 2022 | ||||||
| Revenues: | ||||||||
| Hotel | $ | 11,093,000 | $ | 12,310,000 | ||||
| Real estate | 4,417,000 | 4,078,000 | ||||||
| Total revenues | 15,510,000 | 16,388,000 | ||||||
| Costs and operating expenses: | ||||||||
| Hotel operating expenses | (9,281,000 | ) | (9,306,000 | ) | ||||
| Real estate operating expenses | (2,356,000 | ) | (2,191,000 | ) | ||||
| Depreciation and amortization expenses | (1,522,000 | ) | (1,329,000 | ) | ||||
| General and administrative expenses | (755,000 | ) | (699,000 | ) | ||||
| Total costs and operating expenses | (13,914,000 | ) | (13,525,000 | ) | ||||
| Income from operations | 1,596,000 | 2,863,000 | ||||||
| Other (expense) income: | ||||||||
| Interest expense - mortgages | (2,251,000 | ) | (2,222,000 | ) | ||||
| Net loss on marketable securities | (785,000 | ) | (810,000 | ) | ||||
| Dividend and interest income | 126,000 | 175,000 | ||||||
| Trading and margin interest expense | (322,000 | ) | (265,000 | ) | ||||
| Total other expense, net | (3,232,000 | ) | (3,122,000 | ) | ||||
| Loss before income taxes | (1,636,000 | ) | (259,000 | ) | ||||
| Income tax benefit | 14,000 | 58,000 | ||||||
| Net loss | (1,622,000 | ) | (201,000 | ) | ||||
| Less: Net loss attributable to the noncontrolling interest | 378,000 | 2,000 | ||||||
| Net loss attributable to The InterGroup Corporation | $ | (1,244,000 | ) | $ | (199,000 | ) | ||
| Net loss per share | ||||||||
| Basic | $ | (0.74 | ) | $ | (0.09 | ) | ||
| Diluted | $ | (0.74 | ) | $ | (0.09 | ) | ||
| Net loss per share attributable to The InterGroup Corporation | ||||||||
| Basic | $ | (0.56 | ) | $ | (0.09 | ) | ||
| Diluted | $ | (0.56 | ) | $ | (0.09 | ) | ||
| Weighted average number of basic common shares outstanding | 2,204,852 | 2,231,228 | ||||||
| Weighted average number of diluted common shares outstanding | 2,204,852 | 2,482,423 | ||||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
THE INTERGROUP CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)SHAREHOLDERS’ DEFICIT
| For the nine months ended March 31, | 2023 | 2022 | ||||||
| Revenues: | ||||||||
| Hotel | $ | 32,632,000 | $ | 19,785,000 | ||||
| Rental income | 11,991,000 | 11,808,000 | ||||||
| Total revenues | 44,623,000 | 31,593,000 | ||||||
| Costs and operating expenses | ||||||||
| Hotel operating expenses | (26,445,000 | ) | (19,356,000 | ) | ||||
| Rental real estate operating expenses | (7,695,000 | ) | (6,620,000 | ) | ||||
| Depreciation and amortization expense | (4,012,000 | ) | (3,468,000 | ) | ||||
| General and administrative expenses | (2,448,000 | ) | (1,966,000 | ) | ||||
| Total costs and operating expenses | (40,600,000 | ) | (31,410,000 | ) | ||||
| Income from operations | 4,023,000 | 183,000 | ||||||
| Other income (expense) | ||||||||
| Interest expense - mortgage | (6,483,000 | ) | (6,712,000 | ) | ||||
| Net gain (loss) on marketable securities | 1,440,000 | (1,032,000 | ) | |||||
| Net loss on marketable securities - Comstock | — | (2,581,000 | ) | |||||
| Gain on debt extinguishment | — | 1,665,000 | ||||||
| Gain on insurance recovery | 2,692,000 | — | ||||||
| Impairment loss on other investments | — | (41,000 | ) | |||||
| Dividend and interest income | 369,000 | 807,000 | ||||||
| Trading and margin interest expense | (1,182,000 | ) | (1,053,000 | ) | ||||
| Total other expense, net | (3,164,000 | ) | (8,947,000 | ) | ||||
| Income (loss) before income taxes | 859,000 | (8,764,000 | ) | |||||
| Income tax (expense) benefit | (107,000 | ) | 2,742,000 | |||||
| Net income (loss) | 752,000 | (6,022,000 | ) | |||||
| Less: Net loss attributable to the noncontrolling interest | 583,000 | 1,392,000 | ||||||
| Net income (loss) attributable to InterGroup Corporation | $ | 1,335,000 | $ | (4,630,000 | ) | |||
| Net income (loss) per share attributable to InterGroup Corporation | ||||||||
| Basic | $ | 0.60 | $ | (2.09 | ) | |||
| Diluted | $ | 0.54 | - | |||||
| Weighted average number of basic common shares outstanding | 2,222,801 | 2,219,220 | ||||||
| Weighted average number of diluted common shares outstanding | 2,473,996 | - | ||||||
(unaudited)
| Shares | Amount | Capital | Deficit | Stock | Deficit | Interest | Deficit | |||||||||||||||||||||||||
| Common Stock | Additional Paid-in | Accumulated | Treasury | InterGroup Shareholders’ | Noncontrolling | Total Shareholders’ | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Stock | Deficit | Interest | Deficit | |||||||||||||||||||||||||
| Balance at July 1, 2023 | 3,459,888 | $ | 33,000 | $ | 2,445,000 | $ | (52,835,000 | ) | $ | (20,794,000 | ) | $ | (71,151,000 | ) | $ | (23,453,000 | ) | $ | (94,604,000 | ) | ||||||||||||
| Net loss | - | - | - | (1,244,000 | ) | - | (1,244,000 | ) | (378,000 | ) | (1,622,000 | ) | ||||||||||||||||||||
| Investment in Portsmouth | - | - | (106,000 | ) | - | - | (106,000 | ) | 84,000 | (22,000 | ) | |||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | (39,000 | ) | (39,000 | ) | - | (39,000 | ) | |||||||||||||||||||||
| Balance at September 30, 2023 | 3,459,888 | $ | 33,000 | $ | 2,339,000 | $ | (54,079,000 | ) | $ | (20,833,000 | ) | $ | (72,540,000 | ) | $ | (23,747,000 | ) | $ | (96,287,000 | ) | ||||||||||||
| Common Stock | Additional Paid-in | Accumulated | Treasury | InterGroup Shareholders’ | Noncontrolling | Total Shareholders’ | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Stock | Deficit | Interest | Deficit | |||||||||||||||||||||||||
| Balance at July 1, 2022 | 3,459,888 | $ | 33,000 | $ | 3,277,000 | $ | (46,116,000 | ) | $ | (19,324,000 | ) | $ | (62,130,000 | ) | $ | (20,874,000 | ) | $ | (83,004,000 | ) | ||||||||||||
| Balance | 3,459,888 | $ | 33,000 | $ | 3,277,000 | $ | (46,116,000 | ) | $ | (19,324,000 | ) | $ | (62,130,000 | ) | $ | (20,874,000 | ) | $ | (83,004,000 | ) | ||||||||||||
| Net Loss | - | - | - | (199,000 | ) | - | (199,000 | ) | (2,000 | ) | (201,000 | ) | ||||||||||||||||||||
| Investment in Portsmouth | - | - | (19,000 | ) | - | - | (19,000 | ) | 14,000 | (5,000 | ) | |||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | (872,000 | ) | (872,000 | ) | - | (872,000 | ) | |||||||||||||||||||||
| Balance at September 30, 2022 | 3,459,888 | $ | 33,000 | $ | 3,258,000 | $ | (46,315,000 | ) | $ | (20,196,000 | ) | $ | (63,220,000 | ) | $ | (20,862,000 | ) | $ | (84,082,000 | ) | ||||||||||||
| Balance | 3,459,888 | $ | 33,000 | $ | 3,258,000 | $ | (46,315,000 | ) | $ | (20,196,000 | ) | $ | (63,220,000 | ) | $ | (20,862,000 | ) | $ | (84,082,000 | ) | ||||||||||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
THE INTERGROUP CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT (UNAUDITED)CASH FLOWS
| Shares | Amount | Capital | Deficit | Stock | Deficit | Interest | Deficit | |||||||||||||||||||||||||
| For the three and nine months ended | Common Stock | Additional Paid- in | Accumulated | Treasury | Total InterGroup Shareholders’ | Non-Controlling | Total Shareholders’ | |||||||||||||||||||||||||
| March 31, 2023 | Shares | Amount | Capital | Deficit | Stock | Deficit | Interest | Deficit | ||||||||||||||||||||||||
| Balance at July 1, 2022 | 3,459,888 | $ | 33,000 | $ | 3,277,000 | $ | (46,116,000 | ) | $ | (19,324,000 | ) | $ | (62,130,000 | ) | $ | (20,874,000 | ) | $ | (83,004,000 | ) | ||||||||||||
| Net loss | — | — | — | (199,000 | ) | — | (199,000 | ) | (2,000 | ) | (201,000 | ) | ||||||||||||||||||||
| Investment in Portsmouth | — | — | (19,000 | ) | — | — | (19,000 | ) | 14,000 | (5,000 | ) | |||||||||||||||||||||
| Purchase of treasury stock | — | — | — | — | (872,000 | ) | (872,000 | ) | — | (872,000 | ) | |||||||||||||||||||||
| Balance, September 30, 2022 | 3,459,888 | 33,000 | 3,258,000 | (46,315,000 | ) | (20,196,000 | ) | (63,220,000 | ) | (20,862,000 | ) | (84,082,000 | ) | |||||||||||||||||||
| Net income (loss) | — | — | — | 1,890,000 | — | 1,890,000 | (323,000 | ) | 1,567,000 | |||||||||||||||||||||||
| Investment in Portsmouth | — | — | (670,000 | ) | — | — | (670,000 | ) | 509,000 | (161,000 | ) | |||||||||||||||||||||
| Purchase of treasury stock | — | — | — | — | (370,000 | ) | (370,000 | ) | — | (370,000 | ) | |||||||||||||||||||||
| Balance, December 31, 2022 | 3,459,888 | 33,000 | 2,588,000 | (44,425,000 | ) | (20,566,000 | ) | (62,370,000 | ) | (20,676,000 | ) | (83,046,000 | ) | |||||||||||||||||||
| Net loss | — | — | — | (356,000 | ) | — | (356,000 | ) | (258,000 | ) | (614,000 | ) | ||||||||||||||||||||
| Investment in Portsmouth | — | — | (37,000 | ) | — | — | (37,000 | ) | 28,000 | (9,000 | ) | |||||||||||||||||||||
| Purchase of treasury stock | — | — | — | (190,000 | ) | (190,000 | ) | — | (190,000 | ) | ||||||||||||||||||||||
| Balance, March 31, 2023 | 3,459,888 | $ | 33,000 | $ | 2,551,000 | $ | (44,781,000 | ) | $ | (20,756,000 | ) | $ | (62,953,000 | ) | $ | (20,906,000 | ) | $ | (83,859,000 | ) | ||||||||||||
(unaudited)
| For the three months ended September 30, | 2023 | 2022 | ||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (1,622,000 | ) | $ | (201,000 | ) | ||
| Adjustments to reconcile net loss to net cash provided by | ||||||||
| operating activities: | ||||||||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 1,522,000 | 1,329,000 | ||||||
| Amortization of loan costs | 90,000 | 88,000 | ||||||
| Amortization of other notes payable | (141,000 | ) | (142,000 | ) | ||||
| Deferred taxes | - | (58,000 | ) | |||||
| Net unrealized loss on marketable securities | 679,000 | 10,000 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Investment in marketable securities | 4,076,000 | 352,000 | ||||||
| Other assets | (1,440,000 | ) | (695,000 | ) | ||||
| Accounts payable and other liabilities - Hotel | (898,000 | ) | 1,653,000 | |||||
| Accounts payable and other liabilities | 2,691,000 | 318,000 | ||||||
| Due to securities broker | (2,377,000 | ) | (490,000 | ) | ||||
| Obligations for securities sold | (679,000 | ) | (449,000 | ) | ||||
| Net cash provided by operating activities | 1,901,000 | 1,715,000 | ||||||
| Cash flows from investing activities: | ||||||||
| Payments for hotel investments | (754,000 | ) | (1,632,000 | ) | ||||
| Payments for real estate investments | (608,000 | ) | (800,000 | ) | ||||
| Payments for investment in Portsmouth | (22,000 | ) | (5,000 | ) | ||||
| Net cash used in investing activities | (1,384,000 | ) | (2,437,000 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Net payments of mortgage notes payable | (593,000 | ) | (874,000 | ) | ||||
| Purchase of treasury stock | (39,000 | ) | (872,000 | ) | ||||
| Net cash used in financing activities | (632,000 | ) | (1,746,000 | ) | ||||
| Net change in cash, cash equivalents and restricted cash | (115,000 | ) | (2,468,000 | ) | ||||
| Cash, cash equivalents and restricted cash at the beginning of the period | 12,874,000 | 23,349,000 | ||||||
| Cash, cash equivalents and restricted cash at the end of the period | $ | 12,759,000 | $ | 20,881,000 | ||||
| Supplemental information: | ||||||||
| Interest paid | $ | 1,937,000 | $ | 1,797,000 | ||||
| Taxes paid | $ | 23,000 | $ | - | ||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
THE INTERGROUP CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT (UNAUDITED)
| For the three and nine months ended | Common Stock | Additional Paid- in | Accumulated | Treasury | InterGroup Shareholders’ | Non-Controlling | Total Shareholders’ | |||||||||||||||||||||||||
| March 31, 2023 | Shares | Amount | Capital | Deficit | Stock | Deficit | Interest | Deficit | ||||||||||||||||||||||||
| Balance at July 1, 2021 | 3,404,982 | $ | 33,000 | 2,172,000 | $ | (36,394,000 | ) | $ | (17,370,000 | ) | $ | (51,559,000 | ) | $ | (19,677,000 | ) | $ | (71,236,000 | ) | |||||||||||||
| Net loss | — | — | — | (2,161,000 | ) | — | (2,161,000 | ) | (745,000 | ) | (2,906,000 | ) | ||||||||||||||||||||
| Stock options expense | — | — | 2,000 | — | — | 2,000 | — | 2,000 | ||||||||||||||||||||||||
| Investment in Portsmouth | — | — | (25,000 | ) | — | — | (25,000 | ) | 17,000 | (8,000 | ) | |||||||||||||||||||||
| Purchase of remaining interest in Justice | — | — | — | (999,000 | ) | — | (999,000 | ) | 999,000 | — | ||||||||||||||||||||||
| Investment in Justice | — | — | — | — | — | — | (344,000 | ) | (344,000 | ) | ||||||||||||||||||||||
| Purchase of treasury stock | — | — | — | — | (74,000 | ) | (74,000 | ) | — | (74,000 | ) | |||||||||||||||||||||
| Balance, September 30, 2021 | 3,404,982 | 33,000 | 2,149,000 | (39,554,000 | ) | (17,444,000 | ) | (54,816,000 | ) | (19,750,000 | ) | (74,566,000 | ) | |||||||||||||||||||
| Net loss | — | — | — | (2,003,000 | ) | — | (2,003,000 | ) | (240,000 | ) | (2,243,000 | ) | ||||||||||||||||||||
| Stock options expense | — | — | 2,000 | — | — | 2,000 | — | 2,000 | ||||||||||||||||||||||||
| Investment in Portsmouth | — | — | (33,000 | ) | — | — | (33,000 | ) | 24,000 | (9,000 | ) | |||||||||||||||||||||
| Purchase of treasury stock | — | — | — | — | (1,513,000 | ) | (1,513,000 | ) | — | (1,513,000 | ) | |||||||||||||||||||||
| Balance, December 31, 2021 | 3,404,982 | 33,000 | 2,118,000 | (41,557,000 | ) | (18,957,000 | ) | (58,363,000 | ) | (19,966,000 | ) | (78,329,000 | ) | |||||||||||||||||||
| Balance | 3,404,982 | 33,000 | 2,118,000 | (41,557,000 | ) | (18,957,000 | ) | (58,363,000 | ) | (19,966,000 | ) | (78,329,000 | ) | |||||||||||||||||||
| Issuance of stock | 54,906 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Net loss | — | — | — | (466,000 | ) | — | (466,000 | ) | (407,000 | ) | (873,000 | ) | ||||||||||||||||||||
| Net income (loss) | — | — | — | (466,000 | ) | — | (466,000 | ) | $ | (407,000 | ) | (873,000 | ) | |||||||||||||||||||
| Purchase of Treasury Stock | — | — | — | — | (38,000 | ) | (38,000 | ) | — | (38,000 | ) | |||||||||||||||||||||
| Balance, March 31, 2022 | 3,459,888 | $ | 33,000 | $ | 2,118,000 | $ | (42,023,000 | ) | $ | (18,995,000 | ) | $ | (58,867,000 | ) | $ | (20,373,000 | ) | $ | (79,240,000 | ) | ||||||||||||
| Balance | 3,459,888 | $ | 33,000 | $ | 2,118,000 | $ | (42,023,000 | ) | $ | (18,995,000 | ) | $ | (58,867,000 | ) | $ | (20,373,000 | ) | $ | (79,240,000 | ) | ||||||||||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
THE INTERGROUP CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| For the nine months ended March 31, | 2023 | 2022 | ||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income (loss) | $ | 752,000 | $ | (6,022,000 | ) | |||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 4,012,000 | 3,468,000 | ||||||
| Amortization of loan cost | 265,000 | 341,000 | ||||||
| Amortization of related party note payable | (425,000 | ) | (426,000 | ) | ||||
| Gain on insurance recovery | (2,692,000 | ) | — | |||||
| Gain from debt extinguishment | — | (2,000,000 | ) | |||||
| Deferred taxes | — | (2,740,000 | ) | |||||
| Net unrealized loss (gain) on marketable securities | (2,459,000 | ) | 2,739,000 | |||||
| Impairment loss on other investments | — | 41,000 | ||||||
| Stock compensation expense | — | 4,000 | ||||||
| Change in operating assets and liabilities: | ||||||||
| Investment in marketable securities | (3,459,000 | ) | 7,512,000 | |||||
| Accounts receivable | (11,000 | ) | — | |||||
| Other assets | (738,000 | ) | (1,433,000 | ) | ||||
| Accounts payable and other liabilities - Hotel | 9,019,000 | 321,000 | ||||||
| Accounts payable and other liabilities | (6,585,000 | ) | (317,000 | ) | ||||
| Due to securities broker | (314,000 | ) | (5,197,000 | ) | ||||
| Obligations for securities sold | 208,000 | (5,162,000 | ) | |||||
| Net cash used in operating activities | (2,427,000 | ) | (8,871,000 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Payments for hotel investments | (4,131,000 | ) | (1,694,000 | ) | ||||
| Payments for real estate investments | (1,940,000 | ) | (1,716,000 | ) | ||||
| Insurance proceeds for property damage claims | 2,325,000 | — | ||||||
| Payments for investment in Justice | — | (344,000 | ) | |||||
| Payments for investment in Portsmouth | (175,000 | ) | (17,000 | ) | ||||
| Net cash used in investing activities | (3,921,000 | ) | (3,771,000 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Payments of mortgage and other notes payable | (2,312,000 | ) | (2,857,000 | ) | ||||
| Proceeds from refinance of mortgage notes payable | — | 16,099,000 | ||||||
| Issuance costs of refinancing mortgage and other notes payable | — | (91,000 | ) | |||||
| Purchase of treasury stock | (1,432,000 | ) | (1,625,000 | ) | ||||
| Payments of finance leases | (158,000 | ) | — | |||||
| Net cash provided by (used in) financing activities | (3,902,000 | ) | 11,526,000 | |||||
| Net change in cash, cash equivalents, and restricted cash | (10,250,000 | ) | (1,116,000 | ) | ||||
| Cash, cash equivalents, and restricted cash at the beginning of the period | 23,349,000 | 15,392,000 | ||||||
| Cash, cash equivalents, and restricted cash at the end of the period | $ | 13,099,000 | $ | 14,276,000 | ||||
| Supplemental information: | ||||||||
| Interest paid | $ | 5,862,000 | $ | 5,921,000 | ||||
| Taxes paid | $ | — | $ | 679,000 | ||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
THE INTERGROUP CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NoteNOTE 1. Basis of Presentation and Significant Accounting PoliciesBASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements included herein have been prepared by The InterGroup Corporation (“InterGroup” or the “Company”), according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the unaudited 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 unaudited 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 consolidated financial statements of InterGroup and the notes therein included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2022.2023. The consolidated balance sheet as of JuneSeptember 30, 2022,2023 Condensed Consolidated Balance Sheet was derived from audited financial statementsthe Consolidated Balance Sheet as included in the Company’s Form 10-K for the year ended June 30, 2022.2023.
The unaudited condensed consolidated financial statements include the accounts of our wholly owned and majority-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three and nine months ended March 31,September 30, 2023 are not necessarily indicative of results to be expected for the full fiscal year ending June 30, 2023.2024.
Effective February 19, 2021, the Company’s 83.7%83.7% owned subsidiary, Santa Fe Financial Corporation (“Santa Fe”), a public company (OTCBB: SFEF), was liquidated and all of its assets including its 68.8%68.8% interest in Portsmouth Square Inc. (“Portsmouth”), a public company (OTCBB: PRSI) werewas distributed to its shareholders in exchange for their Santa Fe common stock. As of March 31,September 30, 2023, InterGroup owns approximately 75.6%75.7% of the outstanding common shares of Portsmouth and the Company’s President, Chairman of the Board and Chief Executive Officer, John V. Winfield, owns approximately 2.5%2.5% of the outstanding common shares of Portsmouth. Mr. Winfield also serves as the Chairman of the Board and Chief Executive Officer of Portsmouth.
Portsmouth’s primary business was conducted through its general and limited partnership interest in Justice Investors Limited Partnership, a California limited partnership (“Justice” or the “Partnership”). Effective July 15, 2021, Portsmouth completed the purchase of 100%100% of the limited partnership interest of Justice through the acquisition of the remaining 0.7%0.7% non-controlling interest. Effective December 23, 2021, the Partnership was dissolved. The financial statements of Justice were consolidated with those of Portsmouth.
Prior to its dissolution effective December 23, 2021, Justice owned and operated a 544-room hotel property located at 750 Kearny Street, San Francisco California, known as the Hilton San Francisco Financial District (the “Hotel”) and related facilities including a five-level underground parking garage through its subsidiaries Justice Operating Company, LLC (“Operating”) and Justice Mezzanine Company, LLC (“Mezzanine”). Mezzanine was a wholly owned subsidiary of the Partnership; Operating is a wholly owned subsidiary of Mezzanine. Effective December 23, 2021, Portsmouth replaced Justice as the single member of Mezzanine. Mezzanine is the borrower under certain mezzanine indebtedness of Justice. InJustice, and in December 2013, the Partnership conveyed ownership of the Hotel to Operating. The Hotel is a full-service Hilton brand hotel pursuant to a Franchise License Agreement with HLT Franchise Holding LLC (“Hilton”) through January 31, 2030.
Aimbridge Hospitality (“Aimbridge”) manages the Hotel, along with its five-level parking garage, under a certain Hotel management agreement (“HMA”) with Operating. The term of the management agreement is for an initial period of ten years commencing on the February 3, 2017 date and automatically renews for successive one (1) year periods, to not exceed five years in the aggregate, subject to certain conditions. Under the terms on the HMA, the base management fee payable to Aimbridge shall be one and seven-tenths percent (1.70%) of total Hotel revenue.
In addition to the operations of the Hotel, the Company also generates income from the ownership of rental real estate. Properties include apartment complexes, commercial real estate, and three single-family houses.houses as strategic investments. The properties are located throughout the United States but are concentrated in Texas and Southern California. The Company also has investments in unimproved real property. All of the Company’s residential rental properties and its commercial rental property are managed in-house.
THE INTERGROUP CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
There have been no material changes to the Company’s significant accounting policies during the ninethree months ended March 31,September 30, 2023. Please refer to the Company’s Annual Report on Form 10-K for the year ended June 30, 20222023 for a summary of the significant accounting policies. Certain prior year amounts have been reclassified for consistency with the current period presentation on the condensed consolidated balance sheets. Finance leases of $183,000 as of June 30, 2022, were reclassified to Accounts Payable and Other Liabilities - Hotel. These reclassifications had no effect on the reported results of operations and financial position.
Recently Issued and Adopted Accounting Pronouncements
As of March 31,September 30, 2023, management does not expect athere was no material impact from the recent adoption of new accounting pronouncements, nor expected material impact from recently issued accounting pronouncements yet to be adopted, on the Company’s condensed consolidated financial statements.
Going Concern
The financial statements of the Hotel have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As discussed in Note 2. 11 – Related Party and Other Financing Transactions, as of September 30, 2023, the outstanding balance consists of a senior mortgage loan and mezzanine loan totaling $Liquidity106,896,000. Both loans mature on January 1, 2024, in addition, the Hotel has recurring losses and has an accumulated deficit of $107,287,000.
Due to these factors and the uncertainty around the Hotel’s ability to successfully refinance the debt on favorable terms in the current lending environment gives rise to substantial doubt about the Hotel’s ability to continue as a going concern for one year after the financial statement issuance date.
The Hotel is exploring the possibility of refinancing its senior mortgage and mezzanine debt with potential lenders. Alternatively, the Company is also exploring the possibility of a loan modification or extension to the existing debt with the current lenders, however, the Company may be unable to access further financing when needed. As such, there can be no assurance that the Company will be able to obtain additional liquidity when needed or under acceptable terms, if at all. During 2021 and first part of calendar 2022, we took advantage of the slow periods to make certain capital improvements including complete refinishing of all guest room furniture, resurfacing half of the hotel bathtubs that needed repair, refreshed meeting space and lobby paint and vinyl, replaced all bed frames and socks, and completed the carpet and wall covering corridor installation. In November 2022, we began our guestroom renovation and had completed approximately 307 guestrooms as of September 30, 2023. Hotel improvements are ongoing to remain competitive and we anticipate completing the guestroom renovations by the end March 2024. Once the Company completes its full renovation, management anticipates its high occupancy to continue and its average daily rates to increase as it completes renovation up to the point of generating a positive cash flows.
The financial statements do not include any adjustments to the carrying amounts of assets, liabilities, and reported expenses that may be necessary if the Hotel were unable to continue as a going concern.
NOTE 2 - LIQUIDITY
Historically, the Company’sour cash flows have been primarily generated from our Hotel and real estate operations. However, the responsesdealings by federal, state, and local civil authorities to the COVID-19 pandemic continue to have a material detrimental impact on the Company’sour liquidity. For the ninethree months ended March 31,September 30, 2023, the Company’sour net cash flows used inflow provided by operations was $2,427,0001,901,000. The Company has cautiously re-established certain services at our Hotel butWe have continued to taketaken several steps to preserve capital and increase liquidity at theour Hotel, including implementing strict cost management measures to eliminate non-essential expenses, renegotiating certain reoccurring expenses, and temporarily closing certain hotel services and outlets. As the hospitality and travel environment continues its recovery,to recover, Portsmouth will continue to evaluate what services it bringswe bring back. During the ninethree months ended March 31,September 30, 2023, Portsmouth continued to make capital improvements to the hotel in the amount of $4,131,000755,000 and anticipates continuing its guest room upgrade program during the remainderremaining of fiscal year 2023.2024. During the ninethree months ended March 31,September 30, 2023 the Company made capital improvements in the amount of $1,940,0002,933,000 to its multi-family and commercial real estate.
The Company had cash and cash equivalents of $6,670,0006,686,000 and $14,367,0005,960,000 as of March 31,September 30, 2023 and June 30, 2022,2023, respectively. The Company had restricted cash of $6,073,000 and $6,914,000 as of September 30, 2023 and June 30, 2023, respectively. The Company had marketable securities, net of margin due to securities brokers, of $16,134,00013,629,000 and $10,110,00015,328,000 as of March 31,September 30, 2023 and June 30, 2022,2023, respectively. These marketable securities are short-term investments and liquid in nature.
| -8- |
On July 2, 2014, the Partnership obtained from InterGroup an unsecured loan in the principal amount of $4,250,000 at 12% per year fixed interest, with a term of 2 years, payable interest only each month. InterGroup received a 3% loan fee. The loan may be prepaid at any time without penalty. The loan was extended to July 31, 2023. On December 16, 2020, Justicethe Partnership and InterGroup entered into a loan modification agreement which increased Justice’sthe Partnership’s borrowing from InterGroup as needed up to $10,000,000 and extended the maturity date of the loan to July 31, 2021. As of the date of this report, the maturity date was extended to July 31, 2023. On September 7, 2021, the Board of InterGroup passed a resolution to provide funding to Portsmouth for the working capital of the Hotel up to $16,000,000 if necessary. Upon the dissolution of Justicethe Partnership in December 2021, Portsmouth assumed Justice’sthe Partnership’s note payable to InterGroup in the amount of $11,350,000. On December 31, 2021, Portsmouth and InterGroup entered into a loan modification agreement which memorialized the increaseincreased Portsmouth’s borrowing from InterGroup as needed up to $16,000,000. In July 2023, the note maturity date was extended to July 31, 2025 and the substitution of Portsmouth for Justice. During the fiscal year ending June 30, 2022, InterGroup advanced $7,550,000 to the Hotel, bringing the totalborrowing amount due to InterGroupavailable was increased to $14,200,00020,000,000 as. As of June 30, 20222023 the balance of the loan was $15,700,000. The Company agreed to a 0.5% loan extension and March 31, 2023. Currently,modification fee payable to InterGroup. During the three months ended September 30, 2023, the Company does not anticipate any need forneeded additional funding from InterGroup.in the amount of $1,500,000. As of March 31,September 30, 2023 the Companybalance of the loan was $17,200,000 and has not made any pay-downspaid-downs to its note payable to InterGroup. The Company could amend its by-lawsAll material intercompany accounts and increase the number of authorized shares to issue additional shares to raise capital in the public markets if needed. The loan to InterGroup istransactions have been eliminated in consolidation of the Company’s condensed consolidated financial statements.consolidation.
During the fiscal year ended June 30, 2022, the Company refinanced five of our properties’ existing mortgages and obtained a mortgage note payable on one of our California properties, generating net proceeds totaling $16,683,000. The Company will continue to evaluate other refinancing opportunities and could refinance additional multifamily properties should the need arise, or should management consider the interest rate environment favorable. In July 2022, the Company renewed its uncollateralized revolving line of credit from CIBC Bank USA (“CIBC”) at a reduced amount of $2,000,000 from $5,000,000. and the entire $2,000,000 is available to be drawn down should additional liquidity be necessary. The entire $2,000,000 is available to draw down as of March 31,September 30, 2023.
THE INTERGROUP CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company’s known short-term liquidity requirements primarily consist of funds necessary to pay for operating and other expenditures, including management and franchise fees, corporate expenses, payroll and related costs, taxes, interest and principal payments on our outstanding indebtedness, and repairs and maintenance at all of our properties. The Company has been and will continue its efforts to secure a new loan to replace its current first mortgage and mezzanine debt which matures on January 1, 2024. Management anticipates the successful completion of the hotel’s debt refinancing.
The Company’sOur long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities and capital improvements of the Hotel and our real estate properties. We will continue to finance our business activities primarily with existing cash, including from the activities described above, and cash generated from our operations. After considering our approach to liquidity and accessing our available sources of cash, we believe that our cash position, after giving effect to the transactions discussed above, will be adequate to meet anticipated requirements for operating and other expenditures, including corporate expenses, payroll and related benefits, taxes and compliance costs and other commitments, for at least twelve months from the date of issuance of these financial statements, even if the economic recovery takes longer than anticipated. The objectives of our cash management policy are to maintain existing leverage levels and the availability of liquidity, while minimizing operational costs. However, there can be no guarantee that management will be successful with its plan.
The following table provides a summary as of March 31,September 30, 2023, the Company’s material financial obligations which also includes interest payments.
Schedule of Material Financial Obligation
| Total | 3 Months 2023 | Year 2024 | Year 2025 | Year 2026 | Year 2027 | Thereafter | ||||||||||||||||||||||
| Mortgage notes payable | $ | 193,087,000 | $ | 5,578,000 | $ | 108,417,000 | $ | 3,966,000 | $ | 1,171,000 | $ | 3,301,000 | $ | 70,654,000 | ||||||||||||||
| Related party notes payable | 3,096,000 | 142,000 | 567,000 | 567,000 | 567,000 | 463,000 | 790,000 | |||||||||||||||||||||
| Interest | 29,043,000 | 2,176,000 | 5,640,000 | 2,501,000 | 2,381,000 | 2,274,000 | 14,071,000 | |||||||||||||||||||||
| Total | $ | 225,226,000 | $ | 7,896,000 | $ | 114,624,000 | $ | 7,034,000 | $ | 4,119,000 | $ | 6,038,000 | $ | 85,515,000 | ||||||||||||||
SCHEDULE OF MATERIAL FINANCING OBLIGATION
| Total | 2024 | 2025 | 2026 | 2027 | 2028 | Thereafter | ||||||||||||||||||||||
| 9 Months | Year | Year | Year | Year | ||||||||||||||||||||||||
| Total | 2024 | 2025 | 2026 | 2027 | 2028 | Thereafter | ||||||||||||||||||||||
| Mortgage and subordinated notes payable | $ | 192,143,000 | $ | 107,697,000 | $ | 9,319,000 | $ | 1,165,000 | $ | 3,298,000 | $ | 1,772,000 | $ | 68,892,000 | ||||||||||||||
| Other notes payable | 2,813,000 | 425,000 | 567,000 | 567,000 | 463,000 | 317,000 | 474,000 | |||||||||||||||||||||
| Interest | 25,521,000 | 3,797,000 | 2,898,000 | 2,390,000 | 2,284,000 | 2,286,000 | 11,866,000 | |||||||||||||||||||||
| Total | $ | 220,477,000 | $ | 111,919,000 | $ | 12,784,000 | $ | 4,122,000 | $ | 6,045,000 | $ | 4,375,000 | $ | 81,232,000 | ||||||||||||||
Note 3.NOTE 3 – RevenueREVENUE
Our revenue from real estate is primarily rental income from residential and commercial property leases which is recorded when due from residents and is recognized monthly as earned. The revenue recognition rules under ASC 606 specifically excludeeliminates rental revenue from the accounting standard.
The following table present our Hotel revenue disaggregated by revenue streams:streams.
Schedule of Disaggregation of RevenueSCHEDULE OF DISAGGREGATION OF REVENUE
| For the three months ended March 31, | 2023 | 2022 | ||||||||||||||
| For the three months ended September 30, | 2023 | 2022 | ||||||||||||||
| Hotel revenues: | ||||||||||||||||
| Hotel rooms | $ | 8,968,000 | $ | 5,505,000 | $ | 9,561,000 | $ | 10,802,000 | ||||||||
| Food and beverage | 744,000 | 372,000 | 627,000 | 535,000 | ||||||||||||
| Garage | 609,000 | 677,000 | 825,000 | 822,000 | ||||||||||||
| Other operating departments | 109,000 | 78,000 | 80,000 | 151,000 | ||||||||||||
| Total hotel revenues | $ | 10,430,000 | $ | 6,632,000 | ||||||||||||
| Total hotel revenue | $ | 11,093,000 | $ | 12,310,000 | ||||||||||||
THE INTERGROUP CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| For the nine months ended March 31, | 2023 | 2022 | ||||||
| Hotel revenues: | ||||||||
| Hotel rooms | $ | 28,020,000 | $ | 16,285,000 | ||||
| Food and beverage | 1,905,000 | 934,000 | ||||||
| Garage | 2,148,000 | 2,352,000 | ||||||
| Other operating departments | 559,000 | 214,000 | ||||||
| Total hotel revenues | $ | 32,632,000 | $ | 19,785,000 | ||||
Performance obligations
The CompanyWe identified the following performance obligations for which revenue is recognized as the respective performance obligations are satisfied, which results in recognizing the amount the Company expectswe expect to be entitled to for providing the goods or services:
| ● | Cancelable room reservations or ancillary services are typically satisfied as the good or service is transferred to the hotel guest, which is generally when the room stay occurs. | |
| ● | Non-cancelable room reservations and banquet or conference reservations represent a series of distinct goods or services provided over time and satisfied as each distinct good or service is provided, which is reflected by the duration of the room reservation. | |
| ● | Other ancillary goods and services are purchased independently of the room reservation at standalone selling prices and are considered separate performance obligations, which are satisfied when the related good or service is provided to the hotel guest. | |
| ● | Components of package reservations for which each component could be sold separately to other hotel guests are considered separate performance obligations and are satisfied as set forth above. |
● Cancelable room reservations or ancillary services are typically satisfied as the good or service is transferred to the hotel guest, which is generally when the room stay occurs.
● Non-cancelable room reservations and banquet or conference reservations represent a series of distinct goods or services provided over time and satisfied as each distinct good or service is provided, which is reflected by the duration of the room reservation.
● Other ancillary goods and services are purchased independently of the room reservation at standalone selling prices and are considered separate performance obligations, which are satisfied when the related good or service is provided to the hotel guest.
● Components of package reservations for which each component could be sold separately to other hotel guests are considered separate performance obligations and are satisfied as set forth above.
Hotel revenue primarily consists of hotel room rentals, revenue from accommodations sold in conjunction with other services (e.g., package reservations), food and beverage sales and other ancillary goods and services (e.g., parking). Revenue is recognized when rooms are occupied or goods and services have been delivered or rendered, respectively. Payment terms typically align with when the goods and services are provided. For package reservations, the transaction price is allocated to the performance obligations within the package based on the estimated standalone selling prices of each component.
The Company doesWe do not disclose the value of unsatisfied performance obligations for contracts with an expected length of one year or less. Due to the nature of our business, our revenue is not significantly impacted by refunds. Cash payments received in advance of guests staying at our hotel are refunded to hotel guests if the guest cancels within the specified time period, before any services are rendered. Refunds related to service are generally recognized as an adjustment to the transaction price at the time the hotel stay occurs or services are rendered.
Revenue recognition from apartment rental commences when an apartment unit is placed in service and occupied by a rent-paying tenant. Apartment units are leased on a short-term basis, with no lease extending beyond one year.
Contract assets and liabilities
The Company does not have any material contract assets as of March 31,September 30, 2023 and June 30, 2022,2023, other than trade and other receivables, net on our consolidated balance sheets. Our receivables are primarily the result of contracts with customers that were entered within the past 12 months, which are reduced by an allowancea reserve for doubtful accountsestimated credit losses that reflects our estimate of amounts that will not be collected.
The Company records contract liabilities when cash payments are received or due in advance of guests staying at the hotel, which are presented within accounts payablecollected and other liabilities on our unaudited consolidated balance sheetsamounted to $0 and had a balance of $493,000486,000 at July 1, 2022. During the nine months ended March 31,September 30, 2023 the entire $493,000 was recognized as revenue. Contract liabilities decreased to $364,000 as of March 31, 2023. The decrease at December 31, 2022 was primarily driven by advance deposits received from customers for services to be performed after March 31, 2023.and June 30, 2023, respectively.
THE INTERGROUP CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Contract costs
The Company considersWe consider sales commissions earned to be incremental costs of obtaining a contract with our customers. As a practical expedient, the Company expenseswe expense these costs as incurred as our contracts with customers are less than one year.
| -10- |
Note 4. NOTE 4 – INVESTMENT IN HOTEL, NET
Investment in Hotel Net
Investment in hotel consisted of the following as of:
Schedule of Investment in Hotel, Net
| March 31, 2023 | Cost | Accumulated Depreciation | Net Book Value | |||||||||
| Land | $ | 2,739,000 | $ | — | $ | 2,739,000 | ||||||
| Finance Lease ROU assets | 1,805,000 | (1,160,000 | ) | 645,000 | ||||||||
| Furniture and Equipment | 36,991,000 | (29,322,000 | ) | 7,669,000 | ||||||||
| Building and improvements | 64,664,000 | (36,348,000 | ) | 28,316,000 | ||||||||
| Investment in Hotel, net | $ | 106,199,000 | $ | (66,830,000 | ) | $ | 39,369,000 | |||||
| June 30, 2022 | Cost | Accumulated Depreciation | Net Book Value | |||||||||
| Land | $ | 2,738,000 | $ | — | $ | 2,738,000 | ||||||
| Finance Lease ROU assets | 1,805,000 | (922,000 | ) | 883,000 | ||||||||
| Furniture and Equipment | 32,860,000 | (28,567,000 | ) | 4,293,000 | ||||||||
| Building and improvements | 64,665,000 | (35,312,000 | ) | 29,353,000 | ||||||||
| Investment in Hotel, net | $ | 102,068,000 | $ | (64,801,000 | ) | $ | 37,267,000 | |||||
SCHEDULE OF INVESTMENT IN HOTEL. NET
| Accumulated | Net Book | |||||||||||
| September 30, 2023 | Cost | Depreciation | Value | |||||||||
| Land | $ | 2,738,000 | $ | - | $ | 2,738,000 | ||||||
| Finance lease ROU assets | 1,805,000 | (1,318,000 | ) | 487,000 | ||||||||
| Furniture and equipment | 39,481,000 | (30,087,000 | ) | 9,394,000 | ||||||||
| Building and improvements | 64,665,000 | (37,057,000 | ) | 27,608,000 | ||||||||
| Investment in Hotel, net | $ | 108,689,000 | $ | (68,462,000 | ) | $ | 40,227,000 | |||||
| Accumulated | Net Book | |||||||||||
| June 30, 2023 | Cost | Depreciation | Value | |||||||||
| Land | $ | 2,738,000 | $ | - | $ | 2,738,000 | ||||||
| Finance lease ROU assets | 1,805,000 | (1,239,000 | ) | 566,000 | ||||||||
| Furniture and equipment | 38,727,000 | (29,682,000 | ) | 9,045,000 | ||||||||
| Building and improvements | 64,665,000 | (36,696,000 | ) | 27,969,000 | ||||||||
| Investment in Hotel, net | $ | 107,935,000 | $ | (67,617,000 | ) | $ | 40,318,000 | |||||
Finance lease ROU assets, furniture and equipment are stated at cost, depreciated on a straight-line basis over their useful lives ranging from 3 to 7 years and amortized over the life of the lease. Building and improvements are stated at cost, depreciated on a straight-line basis over their useful lives ranging from 15 to 39 years. Depreciation and amortization expense related to the Hotelour investment in hotel for the three months ended March 31, 2023 and March 31, 2022 was $767,000 and $626,000, respectively. Depreciation and amortization related to the Hotel for the nine months ended March 31,September 30, 2023 and 2022 are $2,029,000845,000 and $1,669,000627,000, respectively.
Note 5.NOTE 5 – Investment in Real Estate, NetINVESTMENT IN REAL ESTATE, NET
TheAt September 30, 2023, the Company’s investment in real estate includesconsisted of twenty properties located throughout the United States. These properties include sixteen apartment complexes, three single-family houses as strategic investments, and one commercial real estate property and three single-family houses. The properties are located throughout the United States, but are concentrated in Dallas, Texas and Southern California.property. The Company also has an investment inowns unimproved land located in Maui, Hawaii.
Investment in real estate consisted of the following:
Schedule of Investment in Real EstateSCHEDULE OF INVESTMENT IN REAL ESTATE
| March 31, 2023 | June 30, 2022 | |||||||||||||||
| As of | September 30, 2023 | June 30, 2023 | ||||||||||||||
| Land | $ | 22,998,000 | $ | 22,998,000 | $ | 22,998,000 | $ | 22,998,000 | ||||||||
| Building, improvements and equipment | 73,239,000 | 70,933,000 | ||||||||||||||
| Buildings, improvements and equipment | 73,758,000 | 73,151,000 | ||||||||||||||
| Accumulated depreciation | (49,356,000 | ) | (47,374,000 | ) | (50,698,000 | ) | (50,022,000 | ) | ||||||||
| Investment in real estate, gross | 46,881,000 | 46,557,000 | 46,058,000 | 46,127,000 | ||||||||||||
| Land held for development | 1,468,000 | 1,468,000 | 1,930,000 | 1,930,000 | ||||||||||||
| Investment in real estate, net | $ | 48,349,000 | $ | 48,025,000 | $ | 47,988,000 | $ | 48,057,000 | ||||||||
Building, improvements, and equipment are stated at cost, depreciated on a straight-line basis over their useful lives ranging from 5 to 40 years. During the three months ended September 30, 2023 the Company invested $608,000 in capitalized improvements. Depreciation expense related to the Company’s investment in real estate for the three months ended March 31, 2023 and March 31, 2022 was $663,000 and $609,000, respectively. Depreciation expense related to the Company’sour investment in real estate for the ninethree months ended March 31,September 30, 2023 and 2022 are $1,983,000676,000 and $1,799,000678,000, respectively.
THE INTERGROUP CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 6.NOTE 6 – Investment in Marketable SecuritiesINVESTMENT 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 transferinure to its shareholders through income and/or capital gain.
| -11- |
At March 31,September 30, 2023 and June 30, 2022,2023, all of the Company’s marketable securities are classified as trading securities. The change in the unrealized gains and losses on these investments along with the changes in amounts due to broker are included in earnings. Trading securities are summarized as follows:
SCHEDULE OF TRADING SECURITIES
Schedule of Trading Securities
| Investment | Cost | Gross Unrealized Gain | Gross Unrealized Loss | Net Unrealized Gain (Loss) | Fair Value | |||||||||||||||
| As of March 31, 2023 | ||||||||||||||||||||
| Corporate equities | $ | 14,582,000 | $ | 3,547,000 | $ | (1,162,000 | ) | $ | 2,385,000 | $ | 16,967,000 | |||||||||
| As of June 30, 2022 | ||||||||||||||||||||
| Corporate equities | $ | 11,150,000 | $ | 1,474,000 | $ | (1,575,000 | ) | $ | (101,000 | ) | $ | 11,049,000 | ||||||||
| Gross | Gross | Net | ||||||||||||||||||
| Investment | Cost | Unrealized Gain | Unrealized Loss | Unrealized Gain | Fair Value | |||||||||||||||
| As of September 30, 2023 | ||||||||||||||||||||
| Corporate | ||||||||||||||||||||
| Equities | $ | 11,404,000 | $ | 2,875,000 | $ | (689,000 | ) | $ | 2,186,000 | $ | 13,590,000 | |||||||||
| As of June 30, 2023 | ||||||||||||||||||||
| Corporate | ||||||||||||||||||||
| Equities | $ | 15,419,000 | $ | 3,713,000 | $ | (787,000 | ) | $ | 2,926,000 | $ | 18,345,000 | |||||||||
Net gains (losses) on marketable securities on the statement of operations areis comprised of realized and unrealized gains (losses). Below is the composition of net gains (losses)losses on marketable securities for the three and nine months ended March 31,September 30, 2023 and 2022, respectively:
Schedule of Net Gains (losses) on Marketable Securities Comprising of Realized and Unrealized Gains (Losses)
| For the three months ended March 31, | 2023 | 2022 | ||||||
| Realized gain on marketable securities, net | $ | 503,000 | $ | 127,000 | ||||
| Realized loss on marketable securities related to Comstock | ||||||||
| Unrealized gain on marketable securities, net | 363,000 | 779,000 | ||||||
| Net gain on marketable securities | $ | 866,000 | $ | 906,000 | ||||
SCHEDULE OF NET GAINS (LOSSES) ON MARKETABLE SECURITIES COMPRISING OF REALIZED AND UNREALIZED GAINS (LOSSES)
| For the nine months ended March 31, | 2023 | 2022 | ||||||
| Realized (loss) gain on marketable securities, net | $ | (1,019,000 | ) | $ | 1,707,000 | |||
| Realized loss on marketable securities related to Comstock | — | (2,581,000 | ) | |||||
| Unrealized gain (loss) on marketable securities, net | 2,459,000 | (2,739,000 | ) | |||||
| Net gain (loss) on marketable securities | $ | 1,440,000 | $ | (3,613,000 | ) |
| For the three months ended September 30, | 2023 | 2022 | ||||||
| Realized (loss) on marketable securities, net | $ | (106,000 | ) | $ | (800,000 | ) | ||
| Unrealized loss on marketable securities, net | (679,000 | ) | (10,000 | ) | ||||
| Net loss on marketable securities | $ | (785,000 | ) | $ | (810,000 | ) | ||
Note 7.
Fair Value MeasurementsNOTE 7 - 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, due to securities broker and obligations for securities sold) or the nature and terms of the obligation (i.e., other notes payable and mortgage notes payable).
THE INTERGROUP CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The assets and liabilities measured at fair value on a recurring basis are as follows:
Schedule of Fair Value Measurement on Recurring BasisSCHEDULE OF FAIR VALUE MEASUREMENT ON RECURRING BASIS
| As of | March 31, 2023 Total - Level 1 | June 30, 2022 Total - Level 1 | September 30, 2023 | June 30, 2023 | ||||||||||||
| Assets: | Total - Level 1 | Total - Level 1 | ||||||||||||||
| Investment in marketable securities: | ||||||||||||||||
| REITs and real estate companies | $ | 6,443,000 | $ | 3,289,000 | $ | 3,147,000 | $ | 6,985,000 | ||||||||
| Financial Services | 1,065,000 | 1,755,000 | ||||||||||||||
| Technology | 1,139,000 | 815,000 | 78,000 | 2,779,000 | ||||||||||||
| Basic material | 1,007,000 | 769,000 | ||||||||||||||
| T-Notes | 8,116,000 | 2,093,000 | ||||||||||||||
| Financial services | 965,000 | 1,865,000 | ||||||||||||||
| Consumer cyclical | 42,000 | 1,689,000 | ||||||||||||||
| Basic materials | 106,000 | 1,047,000 | ||||||||||||||
| Healthcare | 417,000 | — | 164,000 | 739,000 | ||||||||||||
| Consumer cyclical | 496,000 | 693,000 | ||||||||||||||
| Communication services | 804,000 | 2,787,000 | 769,000 | 566,000 | ||||||||||||
| Industrials | 258,000 | 385,000 | ||||||||||||||
| Industrial | 11,000 | 485,000 | ||||||||||||||
| Utilities | - | 97,000 | ||||||||||||||
| Energy | 211,000 | 279,000 | 157,000 | - | ||||||||||||
| Treasury notes | 5,055,000 | — | ||||||||||||||
| Other | 72,000 | 277,000 | 35,000 | - | ||||||||||||
| Marketable securities | $ | 16,967,000 | $ | 11,049,000 | ||||||||||||
| Total | $ | 13,590,000 | $ | 18,345,000 | ||||||||||||
The fair values of investments in marketable securities are determined by the most recently traded price of each security at the balance sheet date.
| -12- |
Note 8.NOTE 8 – Cash, Cash Equivalents, and Restricted CashCASH, CASH EQUIVALENTS AND RESTRICTED CASH
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statement of cash flows:
Schedule of Cash, Cash Equivalents and Restricted Cash
| As of | March 31, 2023 | June 30, 2022 | ||||||
| Cash and cash equivalents | $ | 6,670,000 | $ | 14,367,000 | ||||
| Restricted cash | 6,429,000 | 8,982,000 | ||||||
| Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows | $ | 13,099,000 | $ | 23,349,000 | ||||
SCHEDULE OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH
| As of | September 30, 2023 | June 30, 2023 | ||||||
| Cash and cash equivalents | $ | 6,686,000 | $ | 5,960,000 | ||||
| Restricted cash | 6,073,000 | 6,914,000 | ||||||
| Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows | $ | 12,759,000 | $ | 12,874,000 | ||||
Restricted cash is comprised of amounts held by lenders for payment of real estate taxes, insurance, replacement and capital addition reserves for the Hotel and real estate properties.
THE INTERGROUP CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company follows Accounting Standard Codification (ASC) Topic 718 “Compensation – Stock Compensation”, which addresses accounting for equity-based compensation arrangements, including employee stock options and restricted stock units.
Please refer to Note 15 – Stock Based Compensation Plans in the Company’s Form 10-K for the year ended June 30, 20222023 for more detailed information on the Company’s stock-based compensation plans.
During the three months ended March 31,September 30, 2023 and 2022, the Company did tnot record any stock option compensation cost. ForDuring the ninethree months ended March 31, 2023 andSeptember 30, 2022, the Company recorded $ and $ ofdid not record any stock option compensation cost. Stock option compensation costs in each of the periods related to stock options that were previously issued. As of March 31,September 30, 2023 all compensation related to stock options has been fully amortized.
Option-pricing models require the input of various subjective assumptions, including the option’s expected life, estimated forfeiture rates and the price volatility of the underlying stock. The expected stock price volatility is based on analysis of the Company’s stock price history. The Company has selected to use the simplified method for estimating the expected term. The risk-free interest rate is based on the U.S. Treasury interest rates whose term is consistent with the expected life of the stock options. No dividend yield is included as the Company has not issued any dividends and does not anticipate issuing any dividends in the future.
| -13- |
Schedule of Stock Option ActivitySCHEDULE OF STOCK OPTION ACTIVITY
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Life (Years) | Aggregate Intrinsic Value | Number of | Weighted Average | Weighted Average | Aggregate | |||||||||||||||||||||||||||||
| Options outstanding at July 1, 2021 | 341,195 | $ | 16.95 | $ | 8,890,000 | |||||||||||||||||||||||||||||||
| Shares | Exercise Price | Remaining Life | Intrinsic Value | |||||||||||||||||||||||||||||||||
| Oustanding at | July 1, 2022 | 251,195 | $ | 15.95 | years | $ | 6,628,000 | |||||||||||||||||||||||||||||
| Granted | — | — | — | — | - | - | - | - | ||||||||||||||||||||||||||||
| Exercised | (90,000 | ) | 19.77 | — | — | - | - | - | - | |||||||||||||||||||||||||||
| Forfeited | — | — | — | — | - | - | - | - | ||||||||||||||||||||||||||||
| Exchanged | — | — | — | — | - | - | - | - | ||||||||||||||||||||||||||||
| Options outstanding at June 30, 2022 | 251,195 | $ | 15.95 | $ | 6,628,000 | |||||||||||||||||||||||||||||||
| Options exercisable at June 30, 2022 | 251,195 | $ | 15.95 | $ | 6,628,000 | |||||||||||||||||||||||||||||||
| Options vested at June 30, 2022 | 251,195 | $ | 15.95 | $ | 6,628,000 | |||||||||||||||||||||||||||||||
| Outstanding at | June 30, 2023 | 251,195 | $ | 15.95 | years | $ | 4,957,000 | |||||||||||||||||||||||||||||
| Exercisable at | June 30, 2023 | 251,195 | $ | 15.95 | years | $ | 4,957,000 | |||||||||||||||||||||||||||||
| Vested at | June 30, 2023 | 251,195 | $ | 15.95 | years | $ | 4,957,000 | |||||||||||||||||||||||||||||
| Options outstanding at July 1, 2022 | 251,195 | $ | 15.95 | $ | 6,628,000 | |||||||||||||||||||||||||||||||
| Oustanding at | July 1, 2023 | 251,195 | $ | 15.95 | years | $ | 4,957,000 | |||||||||||||||||||||||||||||
| Granted | — | — | — | — | - | - | - | - | ||||||||||||||||||||||||||||
| Exercised | — | — | — | — | - | - | - | - | ||||||||||||||||||||||||||||
| Forfeited | — | — | — | — | - | - | - | - | ||||||||||||||||||||||||||||
| Exchanged | — | — | — | — | - | - | - | - | ||||||||||||||||||||||||||||
| Options outstanding at March 31, 2023 | 251,195 | $ | 15.95 | $ | 7,449,000 | |||||||||||||||||||||||||||||||
| Options exercisable at March 31, 2023 | 251,195 | $ | 15.95 | $ | 7,449,000 | |||||||||||||||||||||||||||||||
| Options vested at March 31, 2023 | 251,195 | $ | 15.95 | $ | 7,449,000 | |||||||||||||||||||||||||||||||
| Outstanding at | September 30, 2023 | 251,195 | $ | 15.95 | years | $ | 3,661,000 | |||||||||||||||||||||||||||||
| Exercisable at | September 30, 2023 | 251,195 | $ | 15.95 | years | $ | 3,661,000 | |||||||||||||||||||||||||||||
| Vested at | September 30, 2023 | 251,195 | $ | 15.95 | years | $ | 3,661,000 | |||||||||||||||||||||||||||||
Note 10.NOTE 10 – Segment InformationSEGMENT INFORMATION
The Company operates in three reportable segments, the operation of the Hotel (“Hotel Operations”), the operation of its multi-family residential properties (“Real Estate Operations”) and the investment of its cash in marketable securities and other investments (“Investment Transactions”). These three operating segments, as presented in the financial statements, reflect how management internally reviews each segment’s performance. Management also makes operational and strategic decisions based on this information.
Information below represents reported segments for the three and nine months ended March 31,September 30, 2023 and 2022. Segment income from Hotel operations consists of the operation of the Hotel and operation of the garage. Segment income from real estate operations consists of the operation of the rental properties. Loss from investments consists of net investment loss, dividend and interest income and investment related expenses.
THE INTERGROUP CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Schedule of Segment Reporting Information
| As of and for the three months ended March 31, 2023 | Hotel Operations | Real Estate Operations | Investment Transactions | Corporate | Total | |||||||||||||||
| Revenues | $ | 10,430,000 | $ | 3,932,000 | $ | — | $ | — | $ | 14,362,000 | ||||||||||
| Segment operating expenses | (8,413,000 | ) | (2,770,000 | ) | — | (836,000 | ) | (12,019,000 | ) | |||||||||||
| Segment income (loss) | 2,017,000 | 1,162,000 | — | (836,000 | ) | 2,343,000 | ||||||||||||||
| Interest expense - mortgage | (1,584,000 | ) | (517,000 | ) | — | — | (2,101,000 | ) | ||||||||||||
| Depreciation and amortization expense | (693,000 | ) | (687,000 | ) | — | — | (1,380,000 | ) | ||||||||||||
| Gain (loss) from debt extinguishment | ||||||||||||||||||||
| Income from investments | — | — | 465,000 | — | 465,000 | |||||||||||||||
| Gain on Insurance Recovery | ||||||||||||||||||||
| Income tax benefits | — | — | — | 59,000 | 59,000 | |||||||||||||||
| Net income (loss) | $ | (260,000 | ) | $ | (42,000 | ) | $ | 465,000 | $ | (777,000 | ) | $ | (614,000 | ) | ||||||
| Total assets | $ | 49,162,000 | $ | 48,349,000 | $ | 16,967,000 | $ | 10,411,000 | $ | 124,889,000 | ||||||||||
| As of and for the three months ended March 31, 2022 | Hotel Operations | Real Estate Operations | Investment Transactions | Corporate | Total | |||||||||||||||
| Revenues | $ | 6,632,000 | $ | 3,826,000 | $ | — | $ | — | $ | 10,458,000 | ||||||||||
| Segment operating expenses | (6,544,000 | ) | (2,270,000 | ) | — | (580,000 | ) | (9,394,000 | ) | |||||||||||
| Segment income (loss) | 88,000 | 1,556,000 | — | (580,000 | ) | 1,064,000 | ||||||||||||||
| Interest expense - mortgage | (1,624,000 | ) | (564,000 | ) | — | — | (2,188,000 | ) | ||||||||||||
| Depreciation and amortization expense | (576,000 | ) | (609,000 | ) | — | — | (1,185,000 | ) | ||||||||||||
| Gain from investments | — | — | 725,000 | — | 725,000 | |||||||||||||||
| Income tax benefits | — | — | — | 711,000 | 711,000 | |||||||||||||||
| Net income (loss) | $ | (2,112,000 | ) | $ | 383,000 | $ | 725,000 | $ | 131,000 | $ | (873,000 | ) | ||||||||
| Total assets | $ | 46,385,000 | $ | 47,625,000 | $ | 25,541,000 | $ | 13,502,000 | $ | 133,053,000 | ||||||||||
| As of and for the nine months ended March 31, 2023 | Hotel Operations | Real Estate Operations | Investment Transactions | Corporate | Total | |||||||||||||||
| Revenues | $ | 32,632,000 | $ | 11,991,000 | $ | — | $ | — | $ | 44,623,000 | ||||||||||
| Segment operating expenses | (26,445,000 | ) | (7,695,000 | ) | — | (2,448,000 | ) | (36,588,000 | ) | |||||||||||
| Segment income (loss) | 6,187,000 | 4,296,000 | — | (2,448,000 | ) | 8,035,000 | ||||||||||||||
| Interest expense - mortgage | (4,871,000 | ) | (1,612,000 | ) | — | — | (6,483,000 | ) | ||||||||||||
| Depreciation and amortization expense | (1,955,000 | ) | (2,057,000 | ) | — | — | (4,012,000 | ) | ||||||||||||
| Income from investments | — | — | 627,000 | — | 627,000 | |||||||||||||||
| Gain on Insurance Recovery | — | 2,692,000 | — | — | 2,692,000 | |||||||||||||||
| Income tax expense | — | — | — | (107,000 | ) | (107,000 | ) | |||||||||||||
| Net income (loss) | $ | (639,000 | ) | $ | 3,319,000 | $ | 627,000 | $ | (2,555,000 | ) | $ | 752,000 | ||||||||
| Total assets | $ | 49,162,000 | $ | 48,349,000 | $ | 16,967,000 | $ | 10,411,000 | $ | 124,889,000 | ||||||||||
SCHEDULE OF SEGMENT REPORTING INFORMATION
| As of and for the three months | Hotel | Real Estate | Investment | |||||||||||||||||
| ended September 30, 2023 | Operations | Operations | Transactions | Corporate | Total | |||||||||||||||
| Revenues | $ | 11,093,000 | $ | 4,417,000 | $ | - | $ | - | $ | 15,510,000 | ||||||||||
| Segment operating expenses | (9,281,000 | ) | (2,356,000 | ) | - | (755,000 | ) | (12,392,000 | ) | |||||||||||
| Segment income (loss) | 1,812,000 | 2,061,000 | - | (755,000 | ) | 3,118,000 | ||||||||||||||
| Interest expense - mortgage | (1,606,000 | ) | (645,000 | ) | - | - | (2,251,000 | ) | ||||||||||||
| Depreciation and amortization expense | (845,000 | ) | (677,000 | ) | - | - | (1,522,000 | ) | ||||||||||||
| Loss from investments | - | - | (981,000 | ) | - | (981,000 | ) | |||||||||||||
| Income tax benefit | - | - | - | 14,000 | 14,000 | |||||||||||||||
| Net income (loss) | $ | (639,000 | ) | $ | 739,000 | $ | (981,000 | ) | $ | (741,000 | ) | $ | (1,622,000 | ) | ||||||
| Total assets | $ | 48,099,000 | $ | 47,988,000 | $ | 14,366,000 | $ | 9,091,000 | $ | 119,544,000 | ||||||||||
THE INTERGROUP CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| As of and for the nine months ended March 31, 2022 | Hotel Operations | Real Estate Operations | Investment Transactions | Corporate | Total | |||||||||||||||||||||||||||||||||||
| As of and for the three months | Hotel | Real Estate | Investment | |||||||||||||||||||||||||||||||||||||
| ended September 30, 2022 | Operations | Operations | Transactions | Corporate | Total | |||||||||||||||||||||||||||||||||||
| Revenues | $ | 19,785,000 | $ | 11,808,000 | $ | — | $ | — | $ | 31,593,000 | $ | 12,310,000 | $ | 4,078,000 | $ | - | $ | - | $ | 16,388,000 | ||||||||||||||||||||
| Segment operating expenses | (19,356,000 | ) | (6,620,000 | ) | — | (1,966,000 | ) | (27,942,000 | ) | (9,306,000 | ) | (2,191,000 | ) | - | (699,000 | ) | (12,196,000 | ) | ||||||||||||||||||||||
| Segment income (loss) | 429,000 | 5,188,000 | — | (1,966,000 | ) | 3,651,000 | 3,004,000 | 1,887,000 | - | (699,000 | ) | 4,192,000 | ||||||||||||||||||||||||||||
| Interest expense - mortgage | (4,939,000 | ) | (1,773,000 | ) | — | — | (6,712,000 | ) | (1,632,000 | ) | (590,000 | ) | - | - | (2,222,000 | ) | ||||||||||||||||||||||||
| Depreciation and amortization expense | (1,669,000 | ) | (1,799,000 | ) | — | — | (3,468,000 | ) | (651,000 | ) | (678,000 | ) | - | - | (1,329,000 | ) | ||||||||||||||||||||||||
| Gain (loss) from debt extinguishment | 2,000,000 | (335,000 | ) | — | — | 1,665,000 | ||||||||||||||||||||||||||||||||||
| Loss from investments | — | — | (3,900,000 | ) | — | (3,900,000 | ) | - | - | (900,000 | ) | - | (900,000 | ) | ||||||||||||||||||||||||||
| Income (loss) from investments | — | — | (3,900,000 | ) | — | (3,900,000 | ) | |||||||||||||||||||||||||||||||||
| Income tax benefits | — | — | — | 2,742,000 | 2,742,000 | |||||||||||||||||||||||||||||||||||
| Income tax benefit | - | - | - | 58,000 | 58,000 | |||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | (4,179,000 | ) | $ | 1,281,000 | $ | (3,900,000 | ) | $ | 776,000 | $ | (6,022,000 | ) | $ | 721,000 | $ | 619,000 | $ | (900,000 | ) | $ | (641,000 | ) | $ | (201,000 | ) | ||||||||||||||
| Total assets | $ | 46,385,000 | $ | 47,625,000 | $ | 25,541,000 | $ | 13,502,000 | $ | 133,053,000 | $ | 47,526,000 | $ | 48,147,000 | $ | 10,687,000 | $ | 18,712,000 | $ | 125,072,000 | ||||||||||||||||||||
Note 11.NOTE 11 – Related Party and Other Financing TransactionsRELATED PARTY AND OTHER FINANCING TRANSACTIONS
The following summarizes the balances of related party and other notes payable as of March 31,September 30, 2023 and June 30, 2022,2023, respectively.
Summary of Related Party and Other Notes PayableSUMMARY OF RELATED PARTY AND OTHER FINANCING TRANSACTIONS
| As of | March 31, 2023 | June 30, 2022 | September 30, 2023 | June 30, 2023 | ||||||||||||
| Note Payable - Hilton | $ | 2,137,000 | $ | 2,375,000 | ||||||||||||
| Note payable - Hilton | $ | 1,979,000 | $ | 2,058,000 | ||||||||||||
| Note payable - Aimbridge | 959,000 | 1,146,000 | 834,000 | 896,000 | ||||||||||||
| Total related party notes payable | $ | 3,096,000 | $ | 3,521,000 | ||||||||||||
| Total other notes payable | $ | 2,813,000 | $ | 2,954,000 | ||||||||||||
Note payable to Hilton (Franchisor) is a self-exhausting, interest free development incentive note which is reduced by approximately $317,000316,000 annually through 2030 by Hilton if the Partnership is still a Franchisee with Hilton.
On February 1, 2017, Operating entered into aan HMA with AimbridgeAmbridge to manage the Hotel with an effective takeover date of February 3, 2017. The term of the management agreement is for an initial period of 10 years commencing on the takeover date and automatically renews for an additional year not to exceed five years in aggregate subject to certain conditions. The HMA also provides for AimbridgeAmbridge to advance a key money incentive fee to the Hotel for capital improvements in the amount of $2,000,000 under certain terms and conditions described in a separate key money agreement. The key money contribution shall be amortized in equal monthly amounts over an eight (8) year period commencing on the second anniversary of the takeover date. During the first quarter of fiscal year 2021, the Hotel obtained approval from AimbridgeAmbridge to use the key money for hotel operations and the funds were exhausted by December 31, 2020. The unamortized portion of $959,000834,000 and $1,146,000896,000 of the key money is included in the related party notes payable in the consolidated balance sheets as of March 31,September 30, 2023 and June 30, 2022,2023, respectively.
| -15- |
Future minimum principal payments and amortizations for all related party and other financing transactions are as follows:
Schedule of Future Minimum Principal PaymentsSCHEDULE OF FUTURE MINIMUM PRINCIPAL AMORTIZATIONS
| For the year ending June 30, | ||||||||
| 2023 (3 months) | $ | 141,000 | ||||||
| 2024 | 567,000 | |||||||
| 2024 (9 months) | $ | 425,000 | ||||||
| 2025 | 567,000 | 567,000 | ||||||
| 2026 | 567,000 | 567,000 | ||||||
| 2027 | 463,000 | 463,000 | ||||||
| 2028 | 317,000 | |||||||
| Thereafter | 791,000 | 474,000 | ||||||
| Long term debt | $ | 3,096,000 | $ | 2,813,000 | ||||
As of March 31, 2023 and June 30, 2022, the Company had a $0 balance for accounts payable to related party.
THE INTERGROUP CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
To fund the redemption of limited partnership interests and to repay the prior mortgage of $42,940,000, Justice obtained a $97,000,000 mortgage loan and a $20,000,000 mezzanine loan in December 2013. The 10-year mortgage loan is secured by the Company’s principal asset, the Hotel. The mortgage loan bears an interest rate of 5.275%5.275% per annum with interest only payments due through January 2017. Beginning in February 2017, the loan began to amortize over a thirty-year period through its maturity date of January 2024. Outstanding principal balance on the loan was $87,683,75786,802,000 and $89,114,00087,240,000 as of March 31,September 30, 2023 and June 30, 2022,2023, respectively. As additional security for the mortgage loan, there is a limited guaranty executed by Portsmouth in favor of the mortgage lender. The mezzanine loan is secured by the Operating membership interest held by Mezzanine and is subordinated to the Mortgage Loan. The mezzanine interest only loan hashad an interest rate of 9.75% per annum and a maturity date of January 1, 2024.2024. As additional security for the mezzanine loan, there is a limited guaranty executed by Portsmouth in favor of the mezzanine lender. On July 31, 2019, Mezzanine refinanced the mezzanine loan by entering into a new mezzanine loan agreement (“New Mezzanine Loan Agreement”) with Cred Reit Holdco LLC in the amount of $20,000,000. The prior Mezzanine Loan which had a 9.75%9.75% per annum interest rate was paid off. Interest rate on the new mezzanine loan is 7.25%7.25% and the loan matures on January 1, 2024. Interest only payments are due monthly. Unamortized deferred financing costs were $183,000 and $367,000 as of March 31, 2023 and June 30, 2022, respectively.
Effective May 11, 2017, InterGroup agreed to become an additional guarantor under the limited guaranty and an additional indemnitor under the environmental indemnity for Justice Investors limited partnership’s $97,000,000 mortgage loan and the $20,000,000 mezzanine loan. Pursuant to the agreement, InterGroup is required to maintain certain net worth and liquidity. As of March 31,September 30, 2023, InterGroup is in compliance with both requirements. However, due to the Hotel’s ongoing recovery from the negative impact of COVID-19 on the Hotel’s cash flow,Justice Operating Company, LLC has not been meeting certain of its loan covenants such as the Debt Service Coverage Ratio (“DSCR”) which would trigger the creation of a lockbox by the Lender for all cash collected by the Hotel. However, such lockbox has been created and utilized from the loan inception and will be in place up to loan maturity regardless of the DSCR.
On July 2, 2014, the Partnership obtained from InterGroup an unsecured loan in the principal amount of $4,250,000 at 12% per year fixed interest, with a term of 2 years, payable interest only each month. InterGroup received a 3% loan fee. The loan may be prepaid at any time without penalty. The loan was extended to July 31, 2023. On December 16, 2020, Justicethe Partnership and InterGroup entered into a loan modification agreement which increased Justice’sthe Partnership’s borrowing from InterGroup as needed up to $10,000,000 and extended the maturity date of the loan to July 31, 2021. As of the date of this report, the maturity date was extended to July 31, 2023. Management anticipates Intergroup will expend the loan until July 31, 2024.
On September 7, 2021, the Board of InterGroup passed resolution to provide funding to Portsmouth for the working capital of the Hotel up to $16,000,000 if necessary. Upon the dissolution of Justicethe Partnership in December 2021, Portsmouth assumed Justice’sthe Partnership’s note payable to InterGroup in the amount of $11,350,000. On December 31, 2021, Portsmouth and InterGroup entered into a loan modification agreement which memorialized the increaseincreased Portsmouth’s borrowing from InterGroup as needed up to $16,000,000. In July 2023, the note maturity date was extended to July 31, 2025 and the substitution of Portsmouth for Justice. During the fiscal year ending June 30, 2022, InterGroup advanced $7,550,000 to the Hotel, bringing the totalborrowing amount due to InterGroupavailable was increased to $14,200,00020,000,000 as. As of June 30, 20222023 the balance of the loan was $15,700,000 net of loan amortization costs of zero. The Company agreed to a 0.5% loan extension and March 31, 2023. Currently,modification fee payable to InterGroup. During the three months ended September 30, 2023, the Company does not anticipate any need forneeded additional funding from InterGroup.in the amount of $1,500,000. As of March 31,September 30, 2023 the Companybalance of the loan was $17,200,000 and has not made any pay-downspaid-downs to its note payable to InterGroup. The Company could amend its by-lawsAll material intercompany accounts and increase the number of authorized shares to issue additional shares to raise capital in the public markets if needed. The note payable to InterGroup carries an interest rate of 12% per annum. The loan to InterGroup istransactions have been eliminated in consolidation of the Company’s condensed consolidated financial statements.consolidation.
The Company has been and will continue its efforts to secure a new loan to replace its current first mortgage and mezzanine debt which matures on January 1, 2024. Management anticipates the successful completion of the hotel’s debt refinancing.
In July 2018, InterGroup obtained a revolving $5,000,000 line of credit (“RLOC”) from CIBC Bank USA (“CIBC”). The RLOC carries a variable interest rate of 30-day LIBOR plus 3%. Interest is paid on a monthly basis. In July 2019, the Company obtained a modification from CIBC which extended the maturity date of the RLOC from July 24, 2019 to July 23, 2020.2020. In July 2020, InterGroup entered into a second modification agreement with CIBC which extended the maturity date of its RLOC to July 21, 2021. In July 2022, the Company renewed its RLOC for a year at a reduced amount of $2,000,000 from the $5,000,000 and the entire $2,000,000 is available to be drawn down should additional liquidity be necessary.
THE INTERGROUP CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As disclosed in its Definitive Information Statement on Schedule 14C, filed with the SEC on January 25, 2021, Santa Fe received shareholder approval to distribute its assets, as described and subsequently dissolve, all as set forth in the Information Statement. As InterGroup formerly owned 83.7%83.7% of the outstanding common stock of Santa Fe, the Company received cash of $5,013,000 and shares of Portsmouth common stock in March 2021 as a result of the liquidation of Santa Fe. As a former 3.7%3.7% shareholder of Santa Fe, the Company’s President, Chairman of the Board and Chief Executive Officer, John Winfield, received cash of $221,000 and shares of Portsmouth common stock in March 2021 as a result of the liquidation of Santa Fe. On April 12, 2021, Santa Fe received a filed stamped copy of its Articles of Dissolution from the State of Nevada, and Santa Fe is effectively fully dissolved and no longer in legal existence. In June 2022, InterGroup received a distribution of $1,159,000 of from Santa Fe as the entity received federal and state tax refunds from previously filed final tax returns.
FiveFour of the Portsmouth directors serve as directors of InterGroup. Steve Grunwald is a DirectorThe Company’s Vice President Real Estate was elected President of Portsmouth and replaced Director Babin and became a Director of the Company.in May 2021. The Company’s director and Chairman of the Audit Committee, William J. Nance, serves as Comstock’s director and Chairman of the Audit and Finance, Compensation and Nominating and Governance Committees of Comstock. The Company’s Vice President Real Estate was elected President of Portsmouth in May 2021. Mr. Nance is also a shareholder of Comstock and is the beneficial owner of of Comstock’s shares.
As Chairman of the Executive Strategic Real Estate and Securities Investment Committee, the Company’s President and Chief Executive Officer (CEO), John V. Winfield, directs the investment activity of the Company in public and private markets pursuant to authority granted by the Board of Directors. Mr. Winfield also serves as Chief Executive Officer and Chairman of the Board of Portsmouth and directsoversees the investment activity of Portsmouth. Effective June 2016, Mr. Winfield became the Managing Director of Justice and served in that position until the dissolution of Justice in December 2021. Depending on certain market conditions and various risk factors, the Chief Executive Officer and Portsmouth may, at times, invest in the same companies in which the Company invests. Such investments align the interests of the Company with the interests of related parties because it places the personal resources of the Chief Executive Officer and the resources of Portsmouth, at risk in substantially the same manner as the Company in connection with investment decisions made on behalf of the Company.
NOTE 12 – ACCOUNTS PAYABLE AND OTHER LIABILITIES
Note 12. Accounts Payable and Other Liabilities - Hotel
The following summarizes the balances of accounts payable and other liabilities – Hotel as of March 31,September 30, 2023 and June 30, 2022:
2023.
Schedule of Accounts Payable and Other LiabilitiesSCHEDULE OF ACCOUNTS PAYABLE AND OTHER LIABILITIES - HotelHOTEL
| As of | March 31, 2023 | June 30, 2022 | ||||||
| Payroll and related accruals | $ | 2,524,000 | $ | 2,223,000 | ||||
| Trade Payable | 2,693,000 | 2,841,000 | ||||||
| Withholding and other taxes payable | 700,000 | 920,000 | ||||||
| Advance deposits | 389,000 | 493,000 | ||||||
| Management fees payable | — | 76,000 | ||||||
| Lease payable | — | 183,000 | ||||||
| Security Deposit | 52,000 | 52,000 | ||||||
| Mortgage interest payable | 1,134,000 | 513,000 | ||||||
| Franchise fee payable | 2,219,000 | 184,000 | ||||||
| Management fee payable | 1,488,000 | 1,005,000 | ||||||
| Other payables | 560,000 | — | ||||||
| Total accounts payable and other liabilities - Hotel | $ | 11,759,000 | $ | 8,490,000 | ||||
| As of | September 30, 2023 | June 30, 2023 | ||||||
| Trade payable | $ | 4,261,000 | $ | 3,240,000 | ||||
| Advance deposits | 671,000 | 560,000 | ||||||
| Property tax payable | 1,582,000 | 617,000 | ||||||
| Payroll and related accruals | 3,208,000 | 2,918,000 | ||||||
| Mortgage interest payable | 632,000 | 214,000 | ||||||
| Withholding and other taxes payable | 1,495,000 | 1,204,000 | ||||||
| Security deposit | 954,000 | 925,000 | ||||||
| Franchise fees | 1,707,000 | 2,510,000 | ||||||
| Management fees payable | 1,106,000 | 1,683,000 | ||||||
| Other | 367,000 | 319,000 | ||||||
| Total accounts payable and other liabilities | $ | 15,983,000 | $ | 14,190,000 | ||||
Note 13.NOTE 13 – Subsequent EventsSUBSEQUENT EVENT
The Company evaluated subsequent events through the date that the accompanying unaudited condensed consolidated financial statements were issued. Subsequent to March 31, 2023,issued, and has determined that no material subsequent events exist through the Company listed its St. Louis, Missouri property for sale.date of this filing.
| Item 2 - | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Item 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND PROJECTIONS
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Forward-looking statements include, but are not limited to, statements related to our expectations regarding the performance of our business, our financial results, our liquidity and capital resources, including anticipated repayment of certain of the Company’s indebtedness, the impact to our business and financial condition, and measures being taken in response to the novel strain of coronavirus and the disease it causes (“COVID-19”), the effects of competition and the effects of future legislation or regulations and other non-historical statements.statements, the impact from macroeconomic factors (including inflation, increases in interest rates, potential economic slowdown or a recession and geopolitical conflicts). Forward-looking statements include all statements that are not historical facts, and in some cases, can be identified by the use of forward-looking terminology such as the words “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “projects,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect our results of operations, financial condition, cash flows, performance or future achievements or events.
Such statements are subject to certain risks and uncertainties. These risks and uncertainties include, but are not limited to, the following: 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, 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 or the outbreak of COVID-19 or similar outbreaks; 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, 2022.2023. These risks and uncertainties 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.
COVID19 UPDATE
The novel strain of coronavirus and the disease it causes (“COVID-19”) have continued to affect the hospitality industry and our business. Beginning in March 2020, travel restrictions and mandated closings of non-essential businesses were imposed, which resulted in temporary suspensions of operations in many hotels in San Francisco, however, the Company did not suspend operations and did not close the hotel. As vaccination rates across the country increased and COVID-19 related restrictions were eased or removed, we saw an increase in travel and hospitality spending beginning in the second calendar quarter of 2021. During calendar year 2022, we continued to witness robust leisure demand and an acceleration in group and business transient demand. However, the potential for an economic slowdown or a recession during calendar year 2023 may disrupt the positive momentum at the Company’s hotel and our industry.
We believe the distribution of the COVID-19 vaccine during 2021 drove the improvement in traveler sentiment we experienced and resulted in an improvement in occupancy, Average Daily Rate (“ADR”) and Revenue per Available Room (“RevPAR”) during 2021 and 2022. If additional virus variants emerge causing re-imposed widespread travel restrictions, the hospitality industry will be negatively affected. While there can be no assurances that the Company will not experience further fluctuations in hotel revenues or earnings due to macroeconomic factors, such as inflation, increases in interest rates, potential economic slowdown or a recession and geopolitical conflicts, we expect to continue to recover through the remainder of fiscal year 2023 based on current demand trends.
RESULTS OF OPERATIONS
As of March 31,September 30, 2023, the Company owned approximately 75.6%75.7% of the common shares of Portsmouth Square, Inc. The Company’s principal sources of revenue are revenues from the hotel owned by Portsmouth, rental income from its investments in multi-family and commercial real estate properties, and income received from investment of its cash and securities assets.
Portsmouth’s primary asset is a 544-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 Portsmouth have been consolidated with those of the Company.
In addition to the operations of the Hotel, the Company also generates income from the ownership and management of its real estate. Properties include sixteen apartment complexes, one commercial real estate property, and three single-family houses.houses as strategic investments. The properties are located throughout the United States but are concentrated in Texas and Southern California. The Company also has an investment in unimproved real property in Hawaii. All of the Company’s residential rental properties in California are managed by a professional third party property management company and the rental properties outside of California are managed by the Company. The commercial real estate in California is also managed by the Company.
The Company acquires its investments in real estate and other investments utilizing cash, securities or debt, subject to approval or guidelines of the Board of Directors. The Company also invests in income-producing instruments, equity and debt securities and will consider other investments if such investments offer growth or profit potential.
Three Months Ended March 31,September 30, 2023 Compared to Three Months Ended March 31,September 30, 2022
The Company had a net loss of $614,000$1,622,000 and $201,000 for the three months ended March 31,September 30, 2023 compared to net loss of $873,000 for the three months ended March 31, 2022.and September 30, 2022, respectively. The change isdecrease was primarily attributable to increased revenues at the improved hotel operations, a change to net gains on marketable securities of $866,000 compared to a net gain on marketable securities of $906,000.Hotel and offset by higher operating costs.
| -18- |
Hotel Operations
The Company had net loss from Hotel operations of $260,000$639,000 for the three months ended March 31,September 30, 2023 compared to net lossincome of $2,112,000$721,000 for the three months ended March 31,September 30, 2022. The decreased losschange is primarily attributedattributable to increasedecrease in revenues due to improvement in-group base specifically Company Meetings, Transient Retail production and the return of San Francisco largest citywide convention-JP Morgan on January 2023.Hotel revenue.
The following table sets forth a more detailed presentation of Hotel operations for the three months ended March 31,September 30, 2023 and 2022:
| 3 months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Hotel Revenues: | ||||||||
| Hotel revenue | $ | 8,968,000 | $ | 5,505,000 | ||||
| Food and beverage revenue | 744,000 | 372,000 | ||||||
| Garage revenue | 609,000 | 677,000 | ||||||
| Other | 109,000 | 78,000 | ||||||
| Total Hotel Revenues | 10,430,000 | 6,632,000 | ||||||
| Operating expenses excluding interest, depreciation and amortization | (8,413,000 | ) | (6,544,000 | ) | ||||
| Operating income before interest, depreciation and amortization | 2,017,000 | 88,000 | ||||||
| Interest expense - mortgage | (1,584,000 | ) | (1,624,000 | ) | ||||
| Depreciation and amortization expense | (693,000 | ) | (576,000 | ) | ||||
| Net loss from Hotel operations | $ | (260,000 | ) | $ | (2,112,000 | ) | ||
| For the three months ended September 30, | 2023 | 2022 | ||||||
| Hotel revenues: | ||||||||
| Hotel rooms | $ | 9,561,000 | $ | 10,803,000 | ||||
| Food and beverage | 627,000 | 535,000 | ||||||
| Garage | 825,000 | 822,000 | ||||||
| Other operating departments | 80,000 | 150,000 | ||||||
| Total hotel revenues | 11,093,000 | 12,310,000 | ||||||
| Operating expenses excluding depreciation and amortization | (9,281,000 | ) | (9,306,000 | ) | ||||
| Operating income before interest, depreciation and amortization | 1,812,000 | 3,004,000 | ||||||
| Interest expense - mortgage | (1,606,000 | ) | (1,632,000 | ) | ||||
| Depreciation and amortization expense | (845,000 | ) | (651,000 | ) | ||||
| Net (loss) income from Hotel operations | $ | (639,000 | ) | $ | 721,000 | |||
For the three months ended March 31,September 30, 2023, the Hotel had revenuesoperating income of $10,430,000 as compared with total revenues for the three months ended March 31, 2022 of $6,632,000. The Hotel had operating income$1,812,000 before interest expense, depreciation, and amortization on total operating revenues of $2,017,000$11,093,000 compared to operating income of $3,004,000 before interest expense, depreciation, and $88,000amortization on total operating revenues of $12,310,000 for the three months ended March 31, 2023 and March 31, 2022, respectively.September 30, 2022.
For the three months ended March 31,September 30, 2023, room revenues increasedrevenue decreased by $3,463,000,$1,242,000 and food and beverage revenue increased by $372,000 and garage decreased by $68,000$92,000 compared to the three months ended March 31,September 30, 2022. The year over year increases in all revenue sources, except for garage, which remained stable, are a result in improvement in group base specifically Company meetings and Social events, increase in retail internet production in transient channels and return of San Francisco largest city wide convention-JP Morgan on January 2023. Total operating expenses increased by $1,869,000$25,000 due to increase in salariesfood and wages, commission, credit card fees, management fees,beverage and franchise fees.room costs.
The following table sets forth the average daily room rate, average occupancy percentage and RevPAR of the Hotel for the three months ended March 31,September 30, 2023 and 2022:2022.
| Average Daily Room Rate | ||||||||||||||||||||||||
| Three Months Ended March 31, | Average Daily Rate | Average Occupancy % | RevPAR | |||||||||||||||||||||
Three Months Ended September 30, | Average Daily Rate | Average Occupancy % |
RevPAR | |||||||||||||||||||||
| 2023 | 234 | 78 | % | 183 | $ | 218 | 88 | % | $ | 191 | ||||||||||||||
| 2022 | 149 | 74 | % | 110 | $ | 230 | 94 | % | $ | 216 | ||||||||||||||
The Hotel’s revenues increaseddecreased by 57%9.9% this quarter as compared to the previous comparable quarter. Average daily rate increaseddecreased by $85,$12, average occupancy increaseddecreased by 4%6.0%, and RevPAR increasedRevPar decreased by $73$25 for the three months ended March 31,September 30, 2023 compared to the three months ended March 31,September 30, 2022.
Real Estate Operations
Revenue from real estate operations increased to $4,417,000 for the three months ended September 30, 2023 from $4,078,000 for the three months ended September 30, 2022 primarily due to decrease in vacancy at its Missouri property which is rebranding and was undergoing renovation. Real estate operating expenses increased to $2,356,000 from $2,191,000 year over year primarily due to increased insurance expense, and painting – contract labor and maintenance and repair expenses. Management continues to review and analyze the Company’s real estate operations to improve occupancy and rental rates and to reduce expenses and improve efficiencies.
| -19- |
Investment Transactions
The Company had a net gainloss on marketable securities of $866,000$785,000 for the three months ended March 31,September 30, 2023 compared to a net gainloss on marketable securities of $906,000$810,000 for the three months ended March 31,September 30, 2022. For the three months ended March 31,September 30, 2023, the Company had a net realized loss of $106,000 and a net unrealized loss of $363,000.$679,000. For the three months ended March 31,September 30, 2022, the Company had a net realized gainloss of $127,000$800,000 and a net unrealized gainloss of $779,000. $10,000.
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.
Rental Real Estate Operations
Real estate operations improved during the current quarter. The Company’s real estate revenues increased to $3,932,000 for the three months ended March 31, 2023 from $3,826,000 for the three months ended March 31, 2022. The increase in real estate revenue is due to increased rents at our properties and also due to a one-time $99,000 storm damage insurance claim the Company received on one of its properties. Real estate operating expenses (excluding depreciation) were $2,101,000 and $2,013,000, respectively, for the comparative periods. In the prior comparable quarter, the Company had a $1,710,000 gain on the sale of real estate which it did not have in this quarter. Management continues to review and analyze the Company’s real estate operations to improve occupancy and rental rates and to reduce expenses and improve efficiencies.
Nine Months Ended March 31, 2023 Compared to Nine Months Ended March 31, 2022
The Company had net income of $752,000 for the nine months ended March 31, 2023 compared to net loss of $6,022,000 for the nine months ended March 31, 2022. The change is primarily attributable to the increase in Hotel revenue. The change in net loss to net income is primarily attributable to the change to net gains on marketable securities of $1,440,000 and the gain on insurance recovery of $2,692,000 during the nine months ended March 31, 2023, compared to a net loss on marketable securities of $3,613,000 that was offset by the $1,665,000 gain on extinguishments of debt during the nine months ended March 31, 2022.
Hotel Operations
The Company had net loss from Hotel operations of $639,000 for the nine months ended March 31, 2023 compared to net loss of $4,179,000 for the nine months ended March 31, 2022. The decrease in loss is primarily attributed to the increase revenues as the Hospitality Market continues to improve in group base specifically Company meetings and Social events, retail transient production and the return of San Francisco largest citywide convention JP Morgan on January 2023.
The following table sets forth a more detailed presentation of Hotel operations for the six months ended March 31, 2023 and 2022:
| 9 months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Hotel Revenues: | ||||||||
| Hotel revenue | $ | 28,020,000 | $ | 16,285,000 | ||||
| Food and beverage revenue | 1,905,000 | 934,000 | ||||||
| Garage revenue | 2,148,000 | 2,352,000 | ||||||
| Other | 559,000 | 214,000 | ||||||
| Total Hotel Revenues | 32,632,000 | 19,785,000 | ||||||
| Operating expenses excluding interest, depreciation and amortization | (26,445,000 | ) | (19,356,000 | ) | ||||
| Operating income before interest, depreciation and amortization | 6,187,000 | 429,000 | ||||||
| Gain on extinguishment of debt | — | 2,000,000 | ||||||
| Interest expense - mortgage | (4,871,000 | ) | (4,939,000 | ) | ||||
| Depreciation and amortization expense | (1,955,000 | ) | (1,669,000 | ) | ||||
| Net loss from Hotel operations | $ | (639,000 | ) | $ | (4,179,000 | ) | ||
For the nine months ended March 31, 2023, the Hotel had total revenues of $32,632,000 as compared with total revenues for the nine months ended March 31, 2022 of $19,785,000. The Hotel had operating income before interest expense, depreciation, and amortization of $6,187,000 and $429,000 for the nine months ended March 31, 2023 and 2022, respectively.
For the nine months ended March 31, 2023, room revenues increased by $11,735,000, food and beverage revenue increased by $971,000, and garage revenue decreased by $204,000, compared to the nine months ended March 31, 2022. The year over year increases in all revenues sources, except for garage revenue are a result of improve in group base specifically Company Meetings and Social events, Retail Transient production and the return of San Francisco Larges citywide convention JP Morgan on January 2023. Total operating expenses increased by $7,089,000 due to increases in salaries and wages, rooms commission, credit card fees, management fees, and franchise fees.
The following table sets forth the average daily room rate, average occupancy percentage and RevPAR of the Hotel for the nine months ended March 31, 2023 and 2022.
| Nine Months Ended March 31, | Average Daily Rate | Average Occupancy % | RevPAR | |||||||||
| 2023 | 221 | 85 | % | 188 | ||||||||
| 2022 | 143 | 76 | % | 109 | ||||||||
The Hotel’s revenues increased by 65% for the nine months ended March 31, 2023 as compared to the previous comparable period. Average daily rate increased by $78, average occupancy increased by 9%, and RevPAR increased by $79 for the nine months ended March 31, 2023 compared to the nine months ended March 31, 2022.
Investment Transactions
The Company had a net gain on marketable securities of $1,440,000 for the nine months ended March 31, 2023 compared to a net loss on marketable securities of $3,613,000 for the nine months ended March 31, 2022. For the nine months ended March 31, 2023, the Company had a net realized loss of $1,019,000 and a net unrealized gain of $2,459,000. For the nine months ended March 31, 2022, the Company had a net realized loss of $874,000 and a net unrealized gain of $(2,739,000). 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.
Rental Real Estate Operations
Revenue from real estate operations increased to $11,991,000 for the nine months ended March 31, 2023 from $11,808,000 for the nine months ended March 31, 2022. The increase in real estate revenues is primarily due to increased rents at our properties and a one-time $404,000 storm damage insurance claim received by the Company on two of its properties. Real estate operating expenses increased to $6,460,000 for the nine months ended March 31, 2023 from $5,925,000 for the nine months ended March 31, 2022 primarily as the result of higher repairs and maintenance related costs. In the prior comparable period, the Company had a $1,710,000 gain on the sale of real estate which it did not have in the current period. Management continues to review and analyze the Company’s real estate operations to improve occupancy and rental rates and to reduce expenses and improve efficiencies.
MARKETABLE SECURITIES
The following table shows the composition of the Company’s marketable securities portfolio as of March 31,September 30, 2023 and June 30, 20222023 by selected industry groups.
| % of Total | ||||||||
| As of September 30, 2023 | Investment | |||||||
| Industry Group | Fair Value | Securities | ||||||
| REITs and real estate companies | $ | 3,147,000 | 23 | % | ||||
| Basic material | 106,000 | 1 | % | |||||
| T-Notes | 8,116,000 | 60 | % | |||||
| Technology | 78,000 | 1 | % | |||||
| Financial services | 965,000 | 7 | % | |||||
| Communication services | 769,000 | 6 | % | |||||
| Healthcare | 164,000 | 1 | % | |||||
| Consumer cyclical | 42,000 | 0 | % | |||||
| Energy | 157,000 | 1 | % | |||||
| Industrials | 11,000 | 0 | % | |||||
| Other | 35,000 | 1 | % | |||||
| Total | $ | 13,590,000 | 100 | % | ||||
| As of March 31, 2023 | ||||||||||||||||
| % of Total | ||||||||||||||||
| As of June 30, 2023 | Investment | |||||||||||||||
| Industry Group | Fair Value | % of Total Investment Securities | Fair Value | Securities | ||||||||||||
| REITs and real estate companies | $ | 6,443,000 | 38.0 | % | $ | 6,985,000 | 38 | % | ||||||||
| Communications Services | 804,000 | 4.7 | % | |||||||||||||
| Technology | 2,779,000 | 15 | % | |||||||||||||
| T-Notes | 2,093,000 | 11 | % | |||||||||||||
| Financial services | 1,065,000 | 6.3 | % | 1,865,000 | 10 | % | ||||||||||
| Technology | 1,139,000 | 6.7 | % | |||||||||||||
| Consumer cyclical | 1,689,000 | 9 | % | |||||||||||||
| Basic materials | 1,007,000 | 5.9 | % | 1,047,000 | 6 | % | ||||||||||
| Healthcare | 417,000 | 2.5 | % | 739,000 | 4 | % | ||||||||||
| Consumer cyclical | 496,000 | 2.9 | % | |||||||||||||
| Industrial | 258,000 | 1.5 | % | |||||||||||||
| Energy | 211,000 | 1.3 | % | |||||||||||||
| Treasury notes | 5,055,000 | 29.8 | % | |||||||||||||
| Other | 72,000 | 0.4 | % | |||||||||||||
| Communication services | 566,000 | 3 | % | |||||||||||||
| Industrials | 485,000 | 3 | % | |||||||||||||
| Utilities | 97,000 | 0 | % | |||||||||||||
| $ | 16,967,000 | 100.0 | % | $ | 18,345,000 | 100 | % | |||||||||
| As of June 30, 2022 | ||||||||
| Industry Group | Fair Value | % of Total Investment Securities | ||||||
| REITs and real estate companies | $ | 3,289,000 | 29.8 | % | ||||
| Communications Services | 2,787,000 | 25.2 | % | |||||
| Financial services | 1,755,000 | 15.9 | % | |||||
| Technology | 815,000 | 7.4 | % | |||||
| Basic materials | 769,000 | 7.0 | % | |||||
| Consumer cyclical | 693,000 | 6.3 | % | |||||
| Industrial | 385,000 | 3.5 | % | |||||
| Energy | 279,000 | 2.5 | % | |||||
| Other | 277,000 | 2.5 | % | |||||
| $ | 11,049,000 | 100.0 | % | |||||
As of March 31,September 30, 2023, the Company’s investment portfolio is diversified with 1131 different equity positions. The Company held twoone equity securities that are more than 10% of the equity value of the portfolio each. The largest security position represents 30%15% of the portfolio and consists of the common stock of American Realty Investors, Inc. (NYSE: ARL) which is included in the REITs and real estate companies’companies services industry group. The second largest position represents 29.8% of the portfolio and consists of U.S. government treasury notes.
As of June 30, 2022,2023, the Company’s investment portfolio is diversified with 3859 different equity positions. The Company holds threeone equity securitiessecurity that comprised more than 10% of the equity value of the portfolio. The three largest security positionsposition represent 23%19%, 20%4%, and 13%4% of the portfolio and consists of the common stock of Paramount Global - Preferred Stock (NASDAQ: PARAP), American Realty Investors, Inc. (NYSE:(NASDAQ: ARL), Ouster Inc – Common Stock (NASDAQ: OUST), and BlackRock Muni holdings California Quality Fund Inc. (NYSE: MUC)Bank Hawaii Corp (NASDAQ: BOH), which are included in the Communications, REITs and real estate companies, Financial Services, and Financial Services industry groups, respectively.
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The following table shows the net gain (loss)loss on the Company’s marketable securities and the associated margin interest and trading expenses for the respective periods:
| For the three months ended March 31, | 2023 | 2022 | ||||||||||||||
| Net gain on marketable securities | $ | 866,000 | $ | 906,000 | ||||||||||||
| Impairment loss on other investments | — | — | ||||||||||||||
| For the three months ended September 30, | 2023 | 2022 | ||||||||||||||
| Net loss on marketable securities | $ | (785,000 | ) | $ | (810,000 | ) | ||||||||||
| Dividend and interest income | 72,000 | 158,000 | 126,000 | 175,000 | ||||||||||||
| Margin interest expense | — | (212,000 | ) | (175,000 | ) | (153,000 | ) | |||||||||
| Trading and management expenses | (473,000 | ) | (127,000 | ) | (147,000 | ) | (112,000 | ) | ||||||||
| $ | 465,000 | $ | 725,000 | |||||||||||||
| Net loss from investment transactions | $ | (981,000 | ) | $ | (900,000 | ) | ||||||||||
| For the nine months ended March 31, | 2023 | 2022 | ||||||
| Net gain (loss) on marketable securities | $ | 1,440,000 | $ | (1,032,000 | ) | |||
| Net loss on marketable securities - Comstock | — | (2,581,000 | ) | |||||
| Impairment loss on other investments | — | (41,000 | ) | |||||
| Dividend and interest income | 369,000 | 807,000 | ||||||
| Margin interest expense | — | (638,000 | ) | |||||
| Trading and management expenses | (1,182,000 | ) | (415,000 | ) | ||||
| $ | 627,000 | $ | (3,900,000 | ) | ||||
FINANCIAL CONDITION, LIQUIDITY AND LIQUIDITYCAPITAL SOURCES
The Company had cash and cash equivalents of $6,686,000 and restricted cash of $13,099,000 and $23,349,000$5,960,000 as of March 31,September 30, 2023 and June 30, 2022,2023, respectively. The Company had restricted cash of $6,073,000 and $6,914,000 as of September 30, 2023 and June 30, 2023, respectively. The Company had marketable securities, net of margin due to securities brokers, of $13,629,000 and obligations for securities sold, of $16,134,000 and $10,110,000$15,328,000 as of March 31,September 30, 2023 and June 30, 2022,2023, respectively. These marketable securities are short-term investments and liquid in nature.
On July 2, 2014, the Partnership obtained from InterGroup an unsecured loan in the principal amount of $4,250,000 at 12% per year fixed interest, with a term of 2 years, payable interest only each month. InterGroup received a 3% loan fee. The loan may be prepaid at any time without penalty. The loan was extended to July 31, 2023. On December 16, 2020, Justicethe Partnership and InterGroup entered into a loan modification agreement which increased Justice’sthe Partnership’s borrowing from InterGroup as needed up to $10,000,000 and extended the maturity date of the loan to July 31, 2021. The maturity date was extended to July 31, 2023. Management anticipates Intergroup will expend the loan until July 31, 2024.
$10,000,000. Upon the dissolution of Justicethe Partnership in December 2021, Portsmouth assumed Justice’sthe Partnership’s note payable to InterGroup in the amount of $11,350,000. On December 31, 2021, Portsmouth and InterGroup entered into a loan modification agreement which increased Portsmouth’s borrowing from InterGroup as needed up to $16,000,000. DuringIn July 2023, the fiscal year ending June 30, 2022, InterGroup advanced $7,550,000note maturity date was extended to July 31, 2025 and the Hotel, bringing the totalborrowing amount dueavailable was increased to InterGroup to $14,200,000 as$20,000,000. As of June 30, 20222023 the balance of the loan was $15,700,000. The Company agreed to a 0.5% loan extension and December 31, 2022. Currently, Portsmouth does not anticipate any need formodification fee payable to InterGroup. During the three months ended September 30, 2023, the Company needed additional funding from InterGroup.in the amount of $1,500,000. As of March 31,September 30, 2023 Portsmouththe balance of the loan was $17,200,000 and has not made any pay-downspaid-downs to its note payable to InterGroup. Portsmouth could amend its by-lawsAll material intercompany accounts and increase the number of authorized shares to issue additional shares to raise capital in the public markets or refinance the hotel if needed. The note receivable from Portsmouth istransactions have been eliminated in the Company’s consolidated financial statements. The loan to InterGroup is eliminated in consolidation of the Company’s condensed consolidated financial statements.consolidation.
During the fiscal year ending June 30, 2022, the Company refinanced six of its properties’ existing mortgages and obtained a mortgage note payable on one of our California properties, generating net proceeds totaling $16,683,000. The Company is currently evaluating other refinancing opportunities and we could refinance additional multifamily properties should the need arise, or should management consider the interest rate environment favorable.
The Company had an uncollateralized $5,000,000 revolving line of credit (“LOC”) from CIBC Bank USA (“CIBC”) and the entire $5,000,000 was available to be drawn down as of June 30, 2022. In July 2022, the Company renewed itsit’s LOC for a reduced amount of $2,000,000 and is available in its entirety as of March 31,September 30, 2023.
Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating and other expenditures, including management and franchise fees, corporate expenses, payroll and related costs, taxes, interest and principal payments on our outstanding indebtedness, and repairs and maintenance of the Hotel. The Company has been and will continue its efforts to secure a new loan to replace its current first mortgage and mezzanine debt which matures on January 1, 2024. Management anticipates the successful completion of the hotel’s debt refinancing.at all our properties.
Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities and capital improvements of the Hotel and our real estate properties. We will continue to finance our business activities primarily with existing cash, including from the activities described above, and cash generated from our operations. After considering our approach to liquidity and accessing our available sources of cash, we believe that our cash position, after giving effect to the transactions discussed above, will be adequate to meet anticipated requirements for operating and other expenditures, including corporate expenses, payroll and related benefits, taxes and compliance costs and other commitments, for at least twelve months from the date of issuance of these financial statements, even if current levels of low occupancy were to persist. The objectives of our cash management policy are to maintain existing leverage levels and the availability of liquidity, while minimizing operational costs. However, there can be no guarantee that management will be successful with its plan.
| -21- |
Going Concern
The financial statements of the Hotel have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As discussed in Note 11 – Related Party and Other Financing Transactions, as of September 30, 2023, the outstanding balance consists of a senior mortgage loan and mezzanine loan totaling $106,896,000. Both loans mature on January 1, 2024, in addition, the Hotel has recurring losses and has an accumulated deficit of $107,287,000.
Due to these factors and the uncertainty around the Hotel’s ability to successfully refinance the debt on favorable terms in the current lending environment gives rise to substantial doubt about the Hotel’s ability to continue as a going concern for one year after the financial statement issuance date.
The Hotel is exploring the possibility of refinancing its senior mortgage and mezzanine debt with potential lenders. Alternatively, the Company is also exploring the possibility of a loan modification or extension to the existing debt with the current lenders, however, the Company may be unable to access further financing when needed. As such, there can be no assurance that the Company will be able to obtain additional liquidity when needed or under acceptable terms, if at all. During 2021 and first part of calendar 2022, we took advantage of the slow periods to make certain capital improvements including complete refinishing of all guest room furniture, resurfacing half of the hotel bathtubs that needed repair, refreshed meeting space and lobby paint and vinyl, replaced all bed frames and socks, and completed the carpet and wall covering corridor installation. In November 2022, we began our guestroom renovation and had completed approximately 307 guestrooms as of September 30, 2023. Hotel improvements are ongoing to remain competitive and we anticipate completing the guestroom renovations by the end March 2024. Once the Company completes its full renovation, management anticipates its high occupancy to continue and its average daily rates to increase as it completes renovation up to the point of generating a positive cash flows.
The financial statements do not include any adjustments to the carrying amounts of assets, liabilities, and reported expenses that may be necessary if the Hotel were unable to continue as a going concern.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements.
MATERIAL CONTRACTUAL OBLIGATIONS
The following table provides a summary as of March 31,September 30, 2023, the Company’s material financial obligations which also includingincludes interest payments:payments.
| Total | Three Months 2023 | Year 2024 | Year 2025 | Year 2026 | Year 2027 | Thereafter | 9 Months | Year | Year | Year | Year | |||||||||||||||||||||||||||||||||||||||||||||
| Mortgage note payable | $ | 193,087,000 | $ | 5,578,000 | $ | 108,417,000 | $ | 3,966,000 | $ | 1,171,000 | $ | 3,301,000 | $ | 70,654,000 | ||||||||||||||||||||||||||||||||||||||||||
| Related party notes payable | 3,096,000 | 142,000 | 567,000 | 567,000 | 567,000 | 463,000 | 790,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total | 2024 | 2025 | 2026 | 2027 | 2028 | Thereafter | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Mortgage and subordinated notes payable | $ | 192,143,000 | $ | 107,697,000 | $ | 9,319,000 | $ | 1,165,000 | $ | 3,298,000 | $ | 1,772,000 | $ | 68,892,000 | ||||||||||||||||||||||||||||||||||||||||||
| Other notes payable | 2,813,000 | 425,000 | 567,000 | 567,000 | 463,000 | 317,000 | 474,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Interest | 29,043,000 | 2,176,000 | 5,640,000 | 2,501,000 | 2,381,000 | 2,274,000 | 14,071,000 | 25,521,000 | 3,797,000 | 2,898,000 | 2,390,000 | 2,284,000 | 2,286,000 | 11,866,000 | ||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 225,226,000 | $ | 7,896,000 | $ | 114,624,000 | $ | 7,034,000 | $ | 4,119,000 | $ | 6,038,000 | $ | 85,515,000 | $ | 220,477,000 | $ | 111,919,000 | $ | 12,784,000 | $ | 4,122,000 | $ | 6,045,000 | $ | 4,375,000 | $ | 81,232,000 | ||||||||||||||||||||||||||||
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no material off balance sheet arrangements.
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 Aimbridge has the power and ability under the terms of its management agreement to adjust Hotel room rates on an ongoing basis, there should be minimal impact on partnership revenues due to inflation. For the two most recent fiscal years, the impact of inflation on the Company’s income is not viewed by management as material.
The Company’s residential rental properties provide income from short-term operating leases and no lease extends beyond one year. Rental increases are expected to offset anticipated increased property operating expenses. The Company refinanced most of its mortgages with favorable long-term fixed interest rate mortgages during the past three fiscal years.
| -22- |
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Critical accounting estimatespolicies 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 ongoing 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 or methods or assumptions during the sixnine months ended March 31,September 30, 2023.
INCOME TAXES
Judgment is required in addressing the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns (e.g., realization of deferred tax assets, changes in tax laws, or interpretations thereof). In addition, we are subject to examination of our income tax returns by the IRS and other tax authorities. A change in the assessment of the outcomes of such matters could materially impact our consolidated financial statements. We evaluate tax positions taken or expected to be taken on a tax return to determine whether they are more likely than not of being sustained, assuming that the tax reporting positions will be examined by taxing authorities with full knowledge of all relevant information, prior to recording the related tax benefit in our consolidated financial statements. If a position does not meet the more likely than not standard, the benefit cannot be recognized. Assumptions, judgment, and the use of estimates are required in determining if the “more likely than not” standard has been met when developing the provision for income taxes. A change in the assessment of the “more likely than not” standard with respect to a position could materially impact our consolidated financial statements. See Part II, Item 8, “Financial Statements and Supplementary Data — Note 13 to our Consolidated Financial Statements” on Form 10K for the year ended June 30, 2022.
The Company and its subsidiary Portsmouth, compute and file income tax returns and prepare discrete income tax provisions for financial reporting. The income tax benefit during the three months ended September 30, 2023 and 2022 represents primarily the combined income tax effect of Portsmouth’s pretax loss which includes the net loss from the Hotel and the pre-tax loss from InterGroup (standalone). InterGroup and Portsmouth file their respective income tax returns on a calendar year basis.
DEFERRED INCOME TAXES – VALUATION ALLOWANCE
We assess the realizability of our deferred tax assets quarterly and recognize a valuation allowance when it is more likely than not that some or all of our deferred tax assets are not realizable. This assessment is completed by tax jurisdiction and relies on the weight of both positive and negative evidence available, with significant weight placed on recent financial results. Cumulative pre-tax losses for the three-year period are considered significant objective negative evidence that some or all of our deferred tax assets may not be realizable. Cumulative reported pre-tax income is considered objectively verifiable positive evidence of our ability to generate positive pre-tax income in the future. In accordance with GAAP, when there is a recent history of pre-tax losses, there is little or no weight placed on forecasts for purposes of assessing the recoverability of our deferred tax assets. When necessary, we use systematic and logical methods to estimate when deferred tax liabilities will reverse and generate taxable income and when deferred tax assets will reverse and generate tax deductions. Assumptions, judgment, and the use of estimates are required when scheduling the reversal of deferred tax assets and liabilities, and the exercise is inherently complex and subjective. However, significant judgment will be required to determine the timing and amount of any reversal of the valuation allowance in future periods. See Part II, Item 8, “Financial Statements and Supplementary Data — Note 13 to our Consolidated Financial Statements” on Form 10K for the year ended June 30, 2022.
HOTEL ASSETS REAL ESTATE INVESTMENTS AND DEFINITE-LIVED INTANGIBLE ASSETS
We evaluate our investment in hotel, our investment in real estate,property and equipment, and definite-lived intangible assets for impairment quarterly, and when events or circumstances indicate the carrying value may not be recoverable, we evaluate the net book value of the assets by comparing to the projected undiscounted cash flows of the assets. We use judgment to determine whether indications of impairment exist and consider our knowledge of the hospitality industry, historical experience, location of the property, market conditions, and property-specific information available at the time of the assessment. The results of our analysis could vary from period to period depending on how our judgment is applied and the facts and circumstances available at the time of the analysis. When an indicator of impairment exists, judgment is also required in determining the assumptions and estimates to use within the recoverability analysis and when calculating the fair value of the asset or asset group, if applicable. Changes in economic and operating conditions impacting the judgments used could result in impairments to our long-lived assets in future periods. Historically, changes in estimates used in the property and equipment and definite-lived intangible assets impairment assessment process have not resulted in material impairment charges in subsequent periods as a result of changes made to those estimates. There were no indicators of impairment on its hotel investments or intangible assets and accordingly no impairment losses recorded during the three and nine months ended March 31,September 30, 2023 and 2022, respectively.
| -23- |
Item 3. Quantitative and Qualitative Disclosures Aboutabout Market Risk
We are a smaller reporting company and therefore, we are not required to provide information required by this Item of Form 10-Q.
Item 4. Controls and ProceduresProcedures.
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 suchtheir evaluation, theour Chief Executive Officer and PrincipalChief Financial Officer have concluded that as of the end of such period, the Company’sour disclosure controls and procedures are(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not effective because of a material weakness in ensuringour internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that information requiredthere is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Specifically, the Company’s management has concluded that our control around the interpretation and accounting for the deferred tax asset valuation allowance was not effectively designed or maintained. In light of this material weakness, we performed additional analysis as deemed necessary to be disclosedensure that our financial statements were prepared in accordance with GAAP. Accordingly, management believes that the financial statements included in this filing is accumulatedQuarterly Report on Form 10-Q present fairly in all material respects our financial position, results of operations and communicated to management and is recorded, processed, summarized and reported withincash flows for the time periods specified in the Securities and Exchange Commission rules and forms.period presented.
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.
PART IIII.
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Portsmouth Square, Inc., through its operating company Justice Investors Operating Company, LLC, a Delaware limited liability company (the “Company”), is the owner of the real property located at 750 Kearny Street in San Francisco, currently improved with a 27 – story building which houses a Hilton Hotel (the “Property”). The Property was purchased and improved pursuant to approvals granted bya series of agreements with the City and County of San Francisco (the “City”) in 1970. Thosethe early 1970’s. The terms of the agreements and subsequent approvals and permits included a Major Encroachment Permit (“Permit”)condition by which the Company was required by the City to construct an ornamental overhead pedestrian bridge across Kearny Street, connecting the Property to thea nearby City park and underground parking garage known as Portsmouth Square (the “Bridge”). The constructionIncluded in the approval process was the City’s issuance of a Major Encroachment Permit (“Permit”) allowing the Bridge was a conditionto span over Kearney Street. As of the City’s approval of the construction of the hotel structure on the Property. Effective on May 24, 2022, the City has revokedpurported to revoke the Permit and on June 13, 2022, directed the Company to remove the Bridge at the Company’s expense, including construction management costs and traffic control. Pursuant to a letter dated June 13, 2022, the City’s Department of Public works specifically directed the “removal of the unpermitted pedestrian bridge and all related physical encroachments in the public right-of-way and on City property” and the submission ofsubmit a general bridge removal and restoration plan (the “Plan”). at the Company’s expense. The Company disputes the legality of the purported revocation of the Permit. The Company further disputes the existence of any legal or contractual obligation to remove the Bridge at its expense. In particular, representatives of the Company participated in meetings with the City sinceon and at various times after August 1, 2019, discussingto discuss a collaborative process for the possible removal of the Bridge. Until the recentpurported revocation of the Permit in 2022, the City representatives repeatedly and consistently promised and agreed that the City will pay for the associated costs of any Bridge removal. Nevertheless, without waiving any rights, in an effort to understand all of the available options, and to provide a response to the City’s directives, the Company has engaged a Project Manager, a structural engineering firm and an architect to advise on the process and for the development of a Plan for the Bridge removal, as well as the reconstruction of the front of the Hilton HotelHotel. In that regard, the Company has been working cooperatively with the City on the process for removal of the Bridge and a legal team. Theits related physical encroachments, including obtaining regulatory approvals and necessary permits. A final Plan is currently not expected to be completed until late calendar year of 2023 or early in 2023. At this time, early estimates of2024, and permits are unlikely to be obtained until mid-2024 at the cost of the Plan exceed $2 million.earliest. The Company is currently in discussionsdiscussion with the City regarding both the process and financial responsibility for the implementation of the Plan forand reconstruction of the Bridge removal.impacted portions of the Hotel. Those discussions are expected to continue wellthrough the end of 2023 and into 2023.2024.
| -24- |
The Company may be subject to legal proceedings, claims, and litigation arising in the ordinary course of business. The Company will defend itself vigorously against any such claims. Management does not believe that the impact of such matters will have a material effect on the financial conditions or result of operations when resolved.
Item 1A. RISK FACTORS
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There have been no events that are required to be reported under this Item.
Item 3. DEFAULTS UPON SENIOR SECURITIES
There have been no events that are required to be reported under this Item.
Item 4. MINE SAFETY DISCLOSURES
There have been no events that are required to be reported under this Item.
Item 5. OTHER INFORMATION
There have been no events that are required to be reported under this Item.
Item 6. EXHIBITS
| 101.INS | 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 |
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.
101.INS Inline XBRL Instance Document
101.SCH Inline XBRL Taxonomy Extension Schema
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB Inline XBRL Taxonomy Extension Label Linkbase
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase
104 Cover Page Interactive Data File (embedded within the Inline XBRL document)
SIGNATURES
SIGNATURES
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.
| THE INTERGROUP CORPORATION | |||
| (Registrant) | |||
| Date: | by | /s/ John V. Winfield | |
| President, Chairman of the Board and | |||
| Chief Executive Officer | |||
| Date: | by | /s/ | |
| Ann Marie Blair | |||
| -26- |