NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The
condensed consolidated financial statements included herein have been prepared by Portsmouth Square, Inc. (“Portsmouth”
or the “Company”), without audit, according to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in the condensed consolidated financial statements prepared in
accordance with generally accepted accounting principles (U.S. GAAP) have been condensed or omitted pursuant to such rules and
regulations, although the Company believes the disclosures that are made are adequate to make the information presented not misleading.
Further, the condensed consolidated financial statements reflect, in the opinion of management, all adjustments (which included
only normal recurring adjustments) necessary for a fair statement of the financial position, cash flows and results of operations
as of and for the periods indicated. It is suggested that these financial statements be read in conjunction with the audited financial
statements of Portsmouth and the notes therein included in the Company’s Annual Report on Form 10-K for the year ended June
30, 2019. The March 31, 2020 condensed consolidated balance sheet was derived from the consolidated balance sheet as included
in the Company’s Form 10-K for the year ended June 30, 2019.
The
results of operations for the nine months ended March 31, 2020 are not necessarily indicative of results to be expected for the
full fiscal year ending June 30, 2020.
Portsmouth’s
primary business is conducted through its general and limited partnership interest in Justice Investors Limited Partnership, a
California limited partnership (“Justice” or the “Partnership”). Portsmouth
has a 93.3% limited partnership interest in Justice and is the sole general partner. The financial statements of Justice are consolidated
with those of the Company.
As
of March 31, 2020, Santa Fe Financial Corporation (“Santa Fe”), a public company, owns approximately 68.8% of the
outstanding common shares of Portsmouth. Santa Fe is an 87.3%-owned subsidiary of The InterGroup Corporation (“InterGroup”),
a public company. This percentage includes the power to vote an approximately 3.7% interest in the common stock in Santa Fe owned
by InterGroup’s Chairman and President pursuant to a voting trust agreement entered into on June 30, 1998. InterGroup also
directly owns approximately 13.5% of the common stock of Portsmouth.
Justice,
through its subsidiaries Justice Operating Company, LLC (“Operating”) and Justice Mezzanine Company, LLC (“Mezzanine”)
owns and operates a 544-room hotel property located at 750 Kearny Street, San Francisco California, known as the Hilton San Francisco
Financial District (the “Hotel”) and related facilities including a five-level underground parking garage. Mezzanine
is a wholly owned subsidiary of the Partnership; Operating is a wholly owned subsidiary of Mezzanine. Mezzanine is the borrower
under certain mezzanine indebtedness of Justice, and in December 2013, the Partnership conveyed ownership of the Hotel to Operating.
The Hotel is operated by the partnership as a full-service Hilton brand hotel pursuant to a Franchise License Agreement with HLT
Franchise Holding LLC (“Hilton”) through January 31, 2030.
Justice
entered into a Hotel management agreement (“HMA”) with Interstate Management Company, LLC (“Interstate”)
to manage the Hotel, along with its five-level parking garage, with an effective takeover date of February 3, 2017. The term of
the management agreement is for an initial period of ten years commencing on the takeover date and automatically renews for successive
one (1) year periods, to not exceed five years in the aggregate, subject to certain conditions. Under the terms on the HMA, base
management fee payable to Interstate shall be one and seven-tenths percent (1.70%) of total Hotel revenue. On October 25, 2019,
Interstate merged with Aimbridge Hospitality, North America’s largest independent hotel management firm. With the completion
of the merger, the newly combined company will be positioned under the Aimbridge Hospitality name in the Americas.
Due
to Securities Broker
Various
securities brokers have advanced funds to the Company for the purchase of marketable securities under standard margin agreements.
These advanced funds are recorded as a liability.
Obligations
for Securities Sold
Obligation
for securities sold represents the fair market value of shares sold with the promise to deliver that security at some future date
and the fair market value of shares underlying the written call options with the obligation to deliver that security when and
if the option is exercised. The obligation may be satisfied with current holdings of the same security or by subsequent purchases
of that security. Unrealized gains and losses from changes in the obligation are included in the condensed consolidated statements
of operations.
Income
Tax
The
Company consolidates Justice (“Hotel”) for financial reporting purposes and is not taxed on its non-controlling interest
in the Hotel. The income tax expense during the nine months ended March 31, 2020 and 2019 represent the income tax effect on the
Company’s pretax income which includes its share in the net income of the Hotel.
We
have considered the income tax accounting and disclosure implications of the relief provided by the Coronavirus Aid, Relief, and
Economic Security (CARES) Act enacted on March 27, 2020. The effect of tax law changes is required to be recognized either in
the interim period in which the legislation is enacted or reflected in the computation of the annual effective tax rate, depending
on the nature of the change. As of March 31, 2020, we evaluated the income tax provisions of the CARES Act and have determined
there to be no material effect on the March 31, 2020 tax provision. We will continue to evaluate the income tax provisions of
the CARES Act and monitor the tax law changes that could have income tax accounting and disclosure implications.
Financial
Condition and Liquidity
Historically,
our cash flows have been primarily generated from our Hotel operations. However, management expects that
the ongoing length and severity of the economic downturn, resulting from the continuing and uncertain impact of the COVID-19
pandemic, will have a material adverse impact on our business, financial condition, liquidity and financial results. As
a result of our Hotel’s material decrease in occupancy and average daily rate, we expect our cash flow from operations to
continue to be significantly lower than historical rates for the foreseeable future, until the pandemic resolves, and hotel occupancies
return to historical rates.
We have taken several steps to preserve capital
and increase liquidity, including the implementation of various cost saving initiatives at our Hotel. For further discussion,
see “Item 2 - Negative Effects of COVID-19 on our Business” included in this Quarterly Report. We may also receive
cash generated from the investment of our cash and marketable securities, other investments, and other sources, including financing
from our parent companies, Santa Fe and InterGroup. Subsequent to March 31, 2020, in order to increase its liquidity positions
and take advantage of the favorable interest rate environment, InterGroup refinanced its 151-unit apartment complex in Parsippany,
New Jersey, generating net proceeds of approximately $6,814,000. InterGroup is also currently refinancing two of its California
properties scheduled to close in June and July 2020, and it could refinance additional multifamily properties should the need
arise; however, InterGroup does not deem it necessary at this time. InterGroup has an uncollateralized $8,000,000 revolving line
of credit from CIBC Bank USA (“CIBC”) of which $5,000,000 is available to be drawn down as of June 18, 2020,
should additional liquidity be necessary.
As of March 31, 2020, we had cash, cash
equivalents, and restricted cash of $17,457,000 which included $11,550,000 of restricted cash held by our Hotel senior lender
Wells Fargo Bank, N.A. (“Lender”). Of the total restricted cash, $7,977,000 was held for furniture, fixtures and equipment
(“FF&E”) reserves and $2,432,000 was held for a possible future property improvement plan (“PIP”)
request by our franchisor, Hilton. However, Hilton has confirmed that it will not require a PIP for our Hotel until relicensing
which shall occur at the earlier of (i) January 2030, which is six years after the maturity date of our current senior and mezzanine
loans, or (ii) upon the sale of our Hotel. Therefore, Justice is currently in discussions with the Lender to release the PIP deposits
to the Hotel and to allow the Hotel to utilize some or all of its FF&E reserves to fund operating expenses as well as debt
service. Additionally, Justice has requested to temporarily pay interest only on the senior mortgage and the suspension of the
monthly FF&E reserve installment, for a combined monthly savings in cash flow of approximately $321,000. Justice anticipates
a resolution with the Lender in regard to the aforementioned requests before June 30, 2020.
On
April 9, 2020, Justice entered into a loan agreement (“SBA Loan”) with CIBC Bank USA under the recently enacted CARES
Act administered by the U.S. Small Business Administration. Justice received proceeds of $4,719,000 from the SBA Loan. In accordance
with the requirements of the CARES Act, Justice will use the proceeds from the SBA Loan primarily for payroll costs. The SBA Loan
is scheduled to mature on April 9, 2022 and has a 1.00% interest rate and is subject to the terms and conditions applicable to
loans administered by the U.S. Small Business Administration under the CARES Act. The loan may be forgiven if the funds are used
for payroll and other qualified expenses. New guidance on the criteria for forgiveness continues to be released.
We may also have financing availability,
upon the authorization of the respective board of directors, to borrow from InterGroup to meets our obligations during the next
twelve months and beyond, should the need arise.
We cannot presently estimate the full financial
impact of the unprecedented COVID-19 pandemic on our business or predict the related federal, state and local civil authority
actions, which are highly dependent on the severity and duration of the pandemic, but we expect that the COVID-19 closures and
other imposed restrictions will continue to have a significant adverse impact on our results of operations. Due to the uncertainties
associated with the COVID-19 pandemic and the indeterminate length of time it will affect the hospitality industry, we have taken
proactive measures to secure our liquidity position to be able to meet our obligations for the foreseeable future, including implementing
strict cost management measures to eliminate non-essential expenses, postponing capital expenditures, renegotiating certain reoccurring
expenses, and temporarily closing certain hotel services and outlets.
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 invested in short-term, income-producing instruments and in equity and debt securities when deemed
appropriate. The Company’s marketable securities are classified as trading with unrealized gains and losses recorded through the
consolidated statements of operations.
Our long-term liquidity requirements primarily
consist of funds necessary to pay for scheduled debt maturities and capital improvements of the Hotel. We will continue to finance
our business activities primarily with existing cash, including from the activities described above, and cash generated from our
operations. After considering our approach to liquidity and accessing our available sources of cash, we believe that our cash
position, after giving effect to the transactions discussed above, will be adequate to meet anticipated requirements for operating
and other expenditures, including corporate expenses, payroll and related benefits, taxes and compliance costs and other commitments,
for at least twelve months from the date of issuance of these financial statements, even if current levels of low occupancy were
to persist. The objectives of our cash management policy are to maintain existing leverage levels and the availability of liquidity,
while minimizing operational costs. We believe that our cash on hand, cash provided by the SBA loan, along with other
potential aforementioned sources of liquidity that management may be able to obtain, will be sufficient to fund our working
capital needs, as well as our capital lease and debt obligations for at least the next twelve months and beyond. However,
there can be no guarantee that management will be successful with its plan.
The following table provides a summary
as of March 31, 2020, the Company’s material financial obligations which also including interest payments:
|
|
|
|
|
3 Months
|
|
|
Year
|
|
|
Year
|
|
|
Year
|
|
|
Year
|
|
|
|
|
|
|
Total
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
Thereafter
|
|
Mortgage notes payable
|
|
$
|
112,656,000
|
|
|
$
|
364,000
|
|
|
$
|
1,547,000
|
|
|
$
|
1,632,000
|
|
|
$
|
1,721,000
|
|
|
$
|
107,392,000
|
|
|
$
|
-
|
|
Related party and other notes payable
|
|
|
9,002,000
|
|
|
|
250,000
|
|
|
|
1,016,000
|
|
|
|
4,033,000
|
|
|
|
750,000
|
|
|
|
567,000
|
|
|
|
2,386,000
|
|
Interest
|
|
|
24,403,000
|
|
|
|
2,123,000
|
|
|
|
6,756,000
|
|
|
|
6,283,000
|
|
|
|
6,172,000
|
|
|
|
3,069,000
|
|
|
|
-
|
|
Total
|
|
$
|
146,061,000
|
|
|
$
|
2,737,000
|
|
|
$
|
9,319,000
|
|
|
$
|
11,948,000
|
|
|
$
|
8,643,000
|
|
|
$
|
111,028,000
|
|
|
$
|
2,386,000
|
|
Recently
Issued and Adopted Accounting Pronouncements
In
February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires
lessees to recognize lease assets and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements.
ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods in fiscal years beginning after
December 15, 2018, with early adoption permitted. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements.
ASU 2018-11 provides entities another option for transition, allowing entities to not apply the new standard in the comparative
periods they present in their financial statements in the year of adoption. Effective July 1, 2019, we adopted ASU 2016-02 using
the modified retrospective approach provided by ASU 2018-11. We elected certain practical expedients permitted under the transition
guidance, including the election to carryforward historical lease classification. We also elected the short-term lease practical
expedient, which allowed us to not recognize leases with a term of less than twelve months on our consolidated balance sheets.
In addition, we elected the lease and non-lease components practical expedient, which allowed us to calculate the present value
of the fixed payments without performing an allocation of lease and non-lease components. We did not record any operating lease
right-of-use (“ROU”) assets and operating lease liabilities upon adoption of the new standard as the aggregate value
of the ROU assets and operating lease liabilities are immaterial relative to our total assets and liabilities as of June 30, 2019.
The standard did not have an impact on our other finance leases, statements of operations or cash flows. See Note 3 and Note 10
for balances of finance lease ROU assets and liabilities, respectively.
On
June 16, 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments.” This ASU modifies the impairment model to utilize an expected loss methodology in
place of the currently used incurred loss methodology, which will result in the timelier recognition of losses. ASU No. 2016-13
will be effective for us as of January 1, 2023. The Company is currently reviewing the effect of ASU No. 2016-13.
NOTE
2 – REVENUE
The
following table present our revenues disaggregated by revenue streams.
For the three months ended March 31,
|
|
2020
|
|
|
2019
|
|
Hotel revenues:
|
|
|
|
|
|
|
|
|
Hotel rooms
|
|
$
|
9,642,000
|
|
|
$
|
13,521,000
|
|
Food and beverage
|
|
|
874,000
|
|
|
|
1,218,000
|
|
Garage
|
|
|
650,000
|
|
|
|
652,000
|
|
Other operating departments
|
|
|
93,000
|
|
|
|
78,000
|
|
Total hotel revenue
|
|
$
|
11,259,000
|
|
|
$
|
15,469,000
|
|
For the nine months ended March 31,
|
|
2020
|
|
|
2019
|
|
Hotel revenues:
|
|
|
|
|
|
|
|
|
Hotel rooms
|
|
$
|
35,453,000
|
|
|
$
|
38,608,000
|
|
Food and beverage
|
|
|
3,521,000
|
|
|
|
4,232,000
|
|
Garage
|
|
|
2,162,000
|
|
|
|
2,160,000
|
|
Other operating departments
|
|
|
453,000
|
|
|
|
276,000
|
|
Total hotel revenue
|
|
$
|
41,589,000
|
|
|
$
|
45,276,000
|
|
Performance
obligations
We
identified the following performance obligations for which revenue is recognized as the respective performance obligations are
satisfied, which results in recognizing the amount we expect to be entitled to for providing the goods or services:
|
●
|
Cancelable
room reservations or ancillary services are typically satisfied as the good or service is transferred to the hotel guest,
which is generally when the room stay occurs.
|
|
|
|
|
●
|
Noncancelable
room reservations and banquet or conference reservations represent a series of distinct goods or services provided over
time and satisfied as each distinct good or service is provided, which is reflected by the duration of the room reservation.
|
|
|
|
|
●
|
Other
ancillary goods and services are purchased independently of the room reservation at standalone selling prices and are
considered separate performance obligations, which are satisfied when the related good or service is provided to the hotel
guest.
|
|
|
|
|
●
|
Components
of package reservations for which each component could be sold separately to other hotel guests are considered separate
performance obligations and are satisfied as set forth above.
|
Hotel
revenue primarily consists of hotel room rentals, revenue from accommodations sold in conjunction with other services (e.g., package
reservations), food and beverage sales and other ancillary goods and services (e.g., parking). Revenue is recognized when rooms
are occupied or goods and services have been delivered or rendered, respectively. Payment terms typically align with when the
goods and services are provided. For package reservations, the transaction price is allocated to the performance obligations within
the package based on the estimated standalone selling prices of each component.
We
do not disclose the value of unsatisfied performance obligations for contracts with an expected length of one year or less. Due
to the nature of our business, our revenue is not significantly impacted by refunds. Cash payments received in advance of guests
staying at our hotel are refunded to hotel guests if the guest cancels within the specified time period, before any services are
rendered. Refunds related to service are generally recognized as an adjustment to the transaction price at the time the hotel
stay occurs or services are rendered.
Contract
assets and liabilities
We
do not have any material contract assets as of March 31, 2020 and June 30, 2019, other than trade and other receivables, net on
our condensed consolidated balance sheets. Our receivables are primarily the result of contracts with customers, which are reduced
by an allowance for doubtful accounts that reflects our estimate of amounts that will not be collected.
We
record contract liabilities when cash payments are received or due in advance of guests staying at our hotel, which are presented
within accounts payable and other liabilities on our condensed consolidated balance sheets. Contract liabilities decreased to
$404,000 as of March 31, 2020, from $1,215,000 as of June 30, 2019. The decrease for the nine months ended March 31, 2020 was
primarily driven by $811,000 revenue recognized that was included in the advanced deposits balance as of June 30, 2019.
Contract
costs
We
consider sales commissions earned to be incremental costs of obtaining a contract with our customers. As a practical expedient,
we expense these costs as incurred as our contracts with customers are less than one year.
NOTE
3 – INVESTMENT IN HOTEL, NET
Investment
in hotel consisted of the following as of:
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
March 31, 2020
|
|
Cost
|
|
|
Depreciation
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,124,000
|
|
|
$
|
-
|
|
|
$
|
1,124,000
|
|
Finance lease ROU assets
|
|
|
1,746,000
|
|
|
|
(213,000
|
)
|
|
|
1,533,000
|
|
Furniture and equipment
|
|
|
30,472,000
|
|
|
|
(27,358,000
|
)
|
|
|
3,114,000
|
|
Building and improvements
|
|
|
55,614,000
|
|
|
|
(28,450,000
|
)
|
|
|
27,164,000
|
|
Investment in Hotel, net
|
|
$
|
88,956,000
|
|
|
$
|
(56,021,000
|
)
|
|
$
|
32,935,000
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
June 30, 2019
|
|
Cost
|
|
|
Depreciation
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,124,000
|
|
|
$
|
-
|
|
|
$
|
1,124,000
|
|
Finance lease ROU assets
|
|
|
521,000
|
|
|
|
(35,000
|
)
|
|
|
486,000
|
|
Furniture and equipment
|
|
|
30,585,000
|
|
|
|
(26,840,000
|
)
|
|
|
3,745,000
|
|
Building and improvements
|
|
|
55,488,000
|
|
|
|
(27,491,000
|
)
|
|
|
27,997,000
|
|
Investment in Hotel, net
|
|
$
|
87,718,000
|
|
|
$
|
(54,366,000
|
)
|
|
$
|
33,352,000
|
|
NOTE
4 – INVESTMENT IN REAL ESTATE
In
August 2007, the Company agreed to acquire 50% interest in InterGroup Uluniu, Inc., a Hawaiian corporation and a 100% owned subsidiary
of InterGroup, for $973,000, which represents an amount equal to the costs paid by InterGroup for the acquisition and carrying
costs of approximately two acres of unimproved land held for development located in Maui, Hawaii. As a related-party transaction,
the fairness of the financial terms of the transaction were reviewed and approved by the independent director of the Company.
NOTE
5 - INVESTMENT IN MARKETABLE SECURITIES, NET
The
Company’s investment in marketable securities consists primarily of corporate equities. The Company has also periodically
invested in corporate bonds and income producing securities, which may include interests in real estate-based companies and REITs,
where financial benefit could transfer to its shareholders through income and/or capital gain.
At
March 31, 2020, and June 30, 2019, all of the Company’s marketable securities are classified as trading securities. The
change in the unrealized gains and losses on these investments are included in earnings. Trading securities are summarized as
follows:
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Net
|
|
|
Fair
|
|
Investment
|
|
|
Cost
|
|
|
Unrealized Gain
|
|
|
Unrealized Loss
|
|
|
Unrealized Loss
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
|
$
|
3,921,000
|
|
|
$
|
50,000
|
|
|
$
|
(3,640,000
|
)
|
|
$
|
(3,590,000
|
)
|
|
$
|
331,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
|
$
|
6,923,000
|
|
|
$
|
240,000
|
|
|
$
|
(5,738,000
|
)
|
|
$
|
(5,498,000
|
)
|
|
$
|
1,425,000
|
|
As
of March 31, 2020, and June 30, 2019, approximately 43% and 24%, respectively, of
the investment marketable securities balance above is comprised of the common stock of Comstock Mining, Inc. (“Comstock”
- NYSE AMERICAN: LODE).
As
of March 31, 2020, and June 30, 2019, the Company had $3,631,000 and $5,697,000,
respectively, of unrealized losses related to securities held for over one year. As of March 31, 2020, and June 30, 2019, unrealized
losses related to the Company’s investment in Comstock were $3,594,000 and $5,666,000, respectively. For the nine months
ended March 31, 2020, the decrease in unrealized losses is a result of reclassing $2,266,000 net unrealized gain related to Comstock
that was included in the cost basis as of June 30, 2019.
Net
gains (losses) on marketable securities on the statement of operations is comprised of realized and unrealized gains (losses).
Below is the composition of net gain (loss) on marketable securities for the three and nine months ended March 31, 2020 and 2019,
respectively:
For the three months ended March 31,
|
|
2020
|
|
|
2019
|
|
Realized loss on marketable securities, net
|
|
$
|
(192,000
|
)
|
|
$
|
(80,000
|
)
|
Unrealized (loss) gain on marketable securities, net
|
|
|
(102,000
|
)
|
|
|
87,000
|
|
Unrealized (loss) gain on marketable securities related to LODE
|
|
|
(13,000
|
)
|
|
|
137,000
|
|
Net (loss) gain on marketable securities
|
|
$
|
(307,000
|
)
|
|
$
|
144,000
|
|
For the nine months ended March 31,
|
|
2020
|
|
|
2019
|
|
Realized (loss) gain on marketable securities, net
|
|
$
|
(175,000
|
)
|
|
$
|
68,000
|
|
Unrealized loss on marketable securities, net
|
|
|
(152,000
|
)
|
|
|
(288,000
|
)
|
Unrealized loss on marketable securities related to LODE
|
|
|
(194,000
|
)
|
|
|
(89,000
|
)
|
Net loss on marketable securities
|
|
$
|
(521,000
|
)
|
|
$
|
(309,000
|
)
|
NOTE
6 – OTHER INVESTMENTS, NET
The
Company may also invest, with the approval of the securities investment committee and other Company guidelines, in private investment
equity funds and other unlisted securities, such as convertible notes through private placements. Those investments in non-marketable
securities are carried at cost on the Company’s balance sheet as part of other investments, net of other than temporary
impairment losses.
Other
investments, net consist of the following:
Type
|
|
March 31, 2020
|
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
Private equity hedge fund, at cost
|
|
$
|
99,000
|
|
|
$
|
137,000
|
|
Other preferred stock
|
|
|
30,000
|
|
|
|
59,000
|
|
|
|
$
|
129,000
|
|
|
$
|
196,000
|
|
NOTE
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) or
the nature and terms of the obligation (i.e., other notes payable and mortgage notes payable).
The
assets measured at fair value on a recurring basis are as follows:
|
|
3/31/2020
|
|
|
6/30/2019
|
|
As of
|
|
Total - Level 1
|
|
|
Total - Level 1
|
|
Assets:
|
|
|
|
|
|
|
Investment in marketable securities:
|
|
|
|
|
|
|
Basic materials
|
|
$
|
170,000
|
|
|
$
|
351,000
|
|
REITs and real estate companies
|
|
|
158,000
|
|
|
|
451,000
|
|
Energy
|
|
|
-
|
|
|
|
98,000
|
|
Financial Services
|
|
|
-
|
|
|
|
165,000
|
|
Consumer cyclical
|
|
|
3,000
|
|
|
|
318,000
|
|
Other
|
|
|
-
|
|
|
|
42,000
|
|
|
|
$
|
331,000
|
|
|
$
|
1,425,000
|
|
The
fair values of investments in marketable securities are determined by the most recently traded price of each security at the balance
sheet date.
Financial
assets that are measured at fair value on a non-recurring basis and are not included in the tables above include “Other
investments, net (non-marketable securities),” that were initially measured at cost and have been written down to fair value
as a result of impairment. The following table shows the fair value hierarchy for these assets measured at fair value on a non-recurring
basis as follows:
Assets
|
|
Level 3
|
|
|
March 31, 2020
|
|
|
Net loss for the nine months ended March 31,
2020
|
|
|
|
|
|
|
|
|
|
|
|
Other non-marketable investments
|
|
$
|
129,000
|
|
|
$
|
129,000
|
|
|
$
|
(38,000
|
)
|
Assets
|
|
Level 3
|
|
|
June 30, 2019
|
|
|
Net loss for the nine months ended March 31,
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-marketable investments
|
|
$
|
196,000
|
|
|
$
|
196,000
|
|
|
$
|
(36,000
|
)
|
For
the nine months ended March 31, 2020 and 2019, we received distribution from other non-marketable investments of $29,000 and $35,000,
respectively.
Other
investments in non-marketable securities are carried at cost net of any impairment loss. The Company has no significant influence
or control over the entities that issue these investments and holds less than 20% ownership in each of the investments. These
investments are reviewed on a periodic basis for other-than-temporary impairment. The Company reviews several factors to determine
whether a loss is other-than-temporary. These factors include but are not limited to: (i) the length of time an investment is
in an unrealized loss position, (ii) the extent to which fair value is less than cost, (iii) the financial condition and near
term prospects of the issuer and (iv) our ability to hold the investment for a period of time sufficient to allow for any anticipated
recovery in fair value.
NOTE
8 – CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The
following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated
balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statement of cash flows:
As of
|
|
3/31/2020
|
|
|
6/30/2019
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,907,000
|
|
|
$
|
9,789,000
|
|
Restricted cash
|
|
|
11,550,000
|
|
|
|
11,027,000
|
|
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows
|
|
$
|
17,457,000
|
|
|
$
|
20,816,000
|
|
Restricted
cash is comprised of amounts held by lenders for payment of real estate taxes, insurance, replacement and capital addition reserves
for the Hotel. It also includes key money received from Interstate that is restricted for capital improvements for the Hotel.
NOTE
9 - SEGMENT INFORMATION
The
Company operates in two reportable segments, the operation of the hotel (“Hotel Operations”) and the investment of
its cash in marketable securities and other investments (“Investment Transactions”). These two operating segments,
as presented in the consolidated financial statements, reflect how management internally reviews each segment’s performance.
Management also makes operational and strategic decisions based on this same information.
Information
below represents reporting segments for the three and nine months ended March 31, 2020 and 2019, respectively. Operating income
from Hotel operations consists of the operation of the hotel and operation of the garage. Income (loss) from investment transactions
consist of net investment gain (loss), impairment loss on other investments, net unrealized gain (loss) on other investments,
dividend and interest income and trading and margin interest expense. The other segment consists of corporate general and administrative
expenses and the income tax (expense) benefit for the entire Company.
As of and for the three months
|
|
Hotel
|
|
|
Investment
|
|
|
|
|
|
|
|
ended March 31, 2020
|
|
Operations
|
|
|
Transactions
|
|
|
Corporate
|
|
|
Total
|
|
Revenues
|
|
$
|
11,259,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11,259,000
|
|
Segment operating expenses
|
|
|
(10,060,000
|
)
|
|
|
-
|
|
|
|
(167,000
|
)
|
|
|
(10,227,000
|
)
|
Segment income (loss)
|
|
|
1,199,000
|
|
|
|
-
|
|
|
|
(167,000
|
)
|
|
|
1,032,000
|
|
Interest expense - mortgage and related party
|
|
|
(1,793,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,793,000
|
)
|
Depreciation and amortization expense
|
|
|
(547,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(547,000
|
)
|
Loss from investments
|
|
|
-
|
|
|
|
(337,000
|
)
|
|
|
-
|
|
|
|
(337,000
|
)
|
Income tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
440,000
|
|
|
|
440,000
|
|
Net income (loss)
|
|
$
|
(1,141,000
|
)
|
|
$
|
(337,000
|
)
|
|
$
|
273,000
|
|
|
$
|
(1,205,000
|
)
|
Total assets
|
|
$
|
51,372,000
|
|
|
$
|
460,000
|
|
|
$
|
5,319,000
|
|
|
$
|
57,151,000
|
|
For the three months
|
|
Hotel
|
|
|
Investment
|
|
|
|
|
|
|
|
ended March 31, 2019
|
|
Operations
|
|
|
Transactions
|
|
|
Corporate
|
|
|
Total
|
|
Revenues
|
|
$
|
15,469,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
15,469,000
|
|
Segment operating expenses
|
|
|
(11,378,000
|
)
|
|
|
-
|
|
|
|
(274,000
|
)
|
|
|
(11,652,000
|
)
|
Segment income (loss)
|
|
|
4,091,000
|
|
|
|
-
|
|
|
|
(274,000
|
)
|
|
|
3,817,000
|
|
Interest expense - mortgage and related party
|
|
|
(1,941,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,941,000
|
)
|
Loss on disposal of assets
|
|
|
(398,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(398,000
|
)
|
Depreciation and amortization expense
|
|
|
(561,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(561,000
|
)
|
Gain from investments
|
|
|
-
|
|
|
|
172,000
|
|
|
|
-
|
|
|
|
172,000
|
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(280,000
|
)
|
|
|
(280,000
|
)
|
Net income (loss)
|
|
$
|
1,191,000
|
|
|
$
|
172,000
|
|
|
$
|
(554,000
|
)
|
|
$
|
809,000
|
|
As of and for the nine months
|
|
Hotel
|
|
|
Investment
|
|
|
|
|
|
|
|
ended March 31, 2020
|
|
Operations
|
|
|
Transactions
|
|
|
Corporate
|
|
|
Total
|
|
Revenues
|
|
$
|
41,589,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
41,589,000
|
|
Segment operating expenses
|
|
|
(33,138,000
|
)
|
|
|
-
|
|
|
|
(553,000
|
)
|
|
|
(33,691,000
|
)
|
Segment income (loss)
|
|
|
8,451,000
|
|
|
|
-
|
|
|
|
(553,000
|
)
|
|
|
7,898,000
|
|
Interest expense - mortgage and related party
|
|
|
(5,541,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,541,000
|
)
|
Depreciation and amortization expense
|
|
|
(1,653,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,653,000
|
)
|
Loss from investments
|
|
|
-
|
|
|
|
(533,000
|
)
|
|
|
-
|
|
|
|
(533,000
|
)
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(25,000
|
)
|
|
|
(25,000
|
)
|
Net income (loss)
|
|
$
|
1,257,000
|
|
|
$
|
(533,000
|
)
|
|
$
|
(578,000
|
)
|
|
$
|
146,000
|
|
Total assets
|
|
$
|
51,372,000
|
|
|
$
|
460,000
|
|
|
$
|
5,319,000
|
|
|
$
|
57,151,000
|
|
For the nine months
|
|
Hotel
|
|
|
Investment
|
|
|
|
|
|
|
|
ended March 31, 2019
|
|
Operations
|
|
|
Transactions
|
|
|
Corporate
|
|
|
Total
|
|
Revenues
|
|
$
|
45,276,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
45,276,000
|
|
Segment operating expenses
|
|
|
(33,424,000
|
)
|
|
|
-
|
|
|
|
(596,000
|
)
|
|
|
(34,020,000
|
)
|
Segment income (loss)
|
|
|
11,852,000
|
|
|
|
-
|
|
|
|
(596,000
|
)
|
|
|
11,256,000
|
|
Interest expense - mortgage and related party
|
|
|
(5,733,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,733,000
|
)
|
Loss on disposal of assets
|
|
|
(398,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(398,000
|
)
|
Depreciation and amortization expense
|
|
|
(1,748,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,748,000
|
)
|
Loss from investments
|
|
|
-
|
|
|
|
(356,000
|
)
|
|
|
-
|
|
|
|
(356,000
|
)
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(769,000
|
)
|
|
|
(769,000
|
)
|
Net income (loss)
|
|
$
|
3,973,000
|
|
|
$
|
(356,000
|
)
|
|
$
|
(1,365,000
|
)
|
|
$
|
2,252,000
|
|
NOTE
10 - RELATED PARTY AND OTHER FINANCING TRANSACTIONS
The
following summarizes the balances of related party and other notes payable as of March 31, 2020 and June 30, 2019, respectively.
As of
|
|
3/31/2020
|
|
|
6/30/2019
|
|
Note payable - InterGroup
|
|
$
|
3,000,000
|
|
|
$
|
3,000,000
|
|
Note payable - Hilton
|
|
|
3,088,000
|
|
|
|
3,325,000
|
|
Note payable - Interstate
|
|
|
1,708,000
|
|
|
|
1,896,000
|
|
Total related party and other notes payable
|
|
$
|
7,796,000
|
|
|
$
|
8,221,000
|
|
On
July 2, 2014, the Partnership obtained from InterGroup an unsecured loan in the principal amount of $4,250,000 at 12% per year
fixed interest, with a term of 2 years, payable interest only each month. InterGroup received a 3% loan fee. The loan may be prepaid
at any time without penalty. The loan was extended to July 1, 2021.
Note
payable to Hilton (Franchisor) is a self-exhausting, interest free development incentive note which is reduced by approximately
$316,000 annually through 2030 by Hilton if the Partnership is still a Franchisee with Hilton.
On
February 1, 2017, Justice entered into an HMA with Interstate to manage the Hotel with an effective takeover date of February
3, 2017. The term of the management agreement is for an initial period of 10 years commencing on the takeover date and automatically
renews for an additional year not to exceed five years in aggregate subject to certain conditions. The HMA also provides for Interstate
to advance a key money incentive fee to the Hotel for capital improvements in the amount of $2,000,000 under certain terms and
conditions described in a separate key money agreement. The key money contribution shall be amortized in equal monthly amounts
over an eight (8) year period commencing on the second (2nd) anniversary of the takeover date. As of March 31, 2020,
and June 30, 2019, balance of the key money plus accrued interest is $1,008,000 and $2,049,000, respectively, and is included
in restricted cash in the condensed consolidated balance sheets. Unamortized portion of the key money is included in the related
party notes payable in the condensed consolidated balance sheets.
As
of March 31, 2020, the Company had finance lease obligations outstanding of $1,206,000. These finance leases expire in various
years through 2023 at rates ranging from 4.62% to 6.25% per annum. Minimum future lease payments for assets under finance leases
as of March 31, 2020 are as follows:
For the year ending June 30,
|
|
|
|
|
2020
|
|
|
$
|
126,000
|
|
2021
|
|
|
|
503,000
|
|
2022
|
|
|
|
492,000
|
|
2023
|
|
|
|
188,000
|
|
Total minimum lease payments
|
|
|
|
1,309,000
|
|
Less interest on finance lease
|
|
|
|
(103,000
|
)
|
Present value of future minimum lease payments
|
|
|
$
|
1,206,000
|
|
Future
minimum principal payments for all related party and other financing transactions are as follows:
For the year ending June 30,
|
|
|
|
|
2020
|
|
|
$
|
250,000
|
|
2021
|
|
|
|
1,016,000
|
|
2022
|
|
|
|
4,033,000
|
|
2023
|
|
|
|
750,000
|
|
2024
|
|
|
|
567,000
|
|
Thereafter
|
|
|
|
2,386,000
|
|
|
|
|
$
|
9,002,000
|
|
As
of March 31, 2020, and June 30, 2019, the Company had accounts payable to related party of $2,243,000 and $2,122,000, respectively.
These are amounts due to InterGroup and represent certain shared costs and expenses, primarily general and administrative expenses,
rent, insurance and other expenses that are allocated among the Company, Santa Fe and InterGroup.
To fund the redemption of limited partnership
interests and to repay the prior mortgage of $42,940,000, Justice obtained a $97,000,000 mortgage loan and a $20,000,000 mezzanine
loan in December 2013. The mortgage loan is secured by the Partnership’s principal asset, the Hotel. The mortgage loan bears
an interest rate of 5.275% per annum with interest only payments due through January 2017. Beginning in February 2017, the loan
began to amortize over a thirty-year period through its maturity date of January 2024. Outstanding principal balance on the loan
was $92,656,000 and $93,746,000 as of March 31, 2020 and June 30, 2019, respectively. As additional security for the mortgage
loan, there is a limited guaranty executed by Portsmouth in favor of the mortgage lender. The mezzanine loan is secured by the
Operating membership interest held by Mezzanine and is subordinated to the Mortgage Loan. The mezzanine interest only loan had
an interest rate of 9.75% per annum and a maturity date of January 1, 2024. As additional security for the mezzanine loan, there
is a limited guaranty executed by Portsmouth in favor of the mezzanine lender. On July 31, 2019, Mezzanine refinanced the mezzanine
loan by entering into a new mezzanine loan agreement (“New Mezzanine Loan Agreement”) with Cred Reit Holdco LLC in
the amount of $20,000,000. The prior Mezzanine Loan which had a 9.75% per annum interest rate was paid off. Interest rate on the
new mezzanine loan is 7.25% and the loan matures on January 1, 2024. Interest only payments are due monthly. As a result of the
refinance, Justice has generated $500,000 in annual interest expense savings.
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, 2020, InterGroup
is in compliance with both requirements. However, due to the Hotel’s current low occupancy and its negative impact on
the Hotel’s cash flow, Justice Operating Company, LLC may not meet certain of its loan covenants such as the Debt Service
Coverage Ratio (“DSCR”) which would trigger the creation of a lock-box by the Lender for all cash collected by the
Hotel. However, such lockbox has been created and utilized from the loan inception and will be in place up to loan maturity regardless
of the DSCR. Justice has not missed any of its debt service payments and does not anticipate missing any debt obligations even
during these uncertain times for at least the next twelve months and beyond.
The
Company’s Board of Directors is currently comprised of directors John V. Winfield, William J. Nance, John C. Love, Jerold
R. Babin, and Steve Grunwald. All of the Company’s directors also serve as directors of InterGroup except for Mr. Grunwald.
Messrs. Winfield and Nance also serve on the Board of Santa Fe.
John
V. Winfield serves as Chief Executive Officer and Chairman of the Company, Santa Fe, and InterGroup. Depending on certain market
conditions and various risk factors, the Chief Executive Officer, Santa Fe and InterGroup may, at times, invest in the same companies
in which the Company invests. The Company encourages such investments because it places personal resources of the Chief Executive
Officer and the resources of Santa Fe and InterGroup, at risk in connection with investment decisions made on behalf of the Company.
NOTE
11 – ACCOUNTS PAYABLE AND OTHER LIABILITIES - JUSTICE
The
following summarizes the balances of accounts payable and other liabilities -Justice as of March 31, 2020 and June 30, 2019, respectively.
As of
|
|
3/31/2020
|
|
|
6/30/2019
|
|
|
|
|
|
|
|
|
Trade payable
|
|
$
|
3,041,000
|
|
|
$
|
1,792,000
|
|
Advance deposits
|
|
|
404,000
|
|
|
|
1,215,000
|
|
Property tax payable
|
|
|
31,000
|
|
|
|
1,046,000
|
|
Payroll and related accruals
|
|
|
1,768,000
|
|
|
|
2,584,000
|
|
Interest payable
|
|
|
421,000
|
|
|
|
412,000
|
|
Withholding and other taxes payable
|
|
|
1,144,000
|
|
|
|
1,831,000
|
|
Security deposit
|
|
|
52,000
|
|
|
|
52,000
|
|
Other payables
|
|
|
1,255,000
|
|
|
|
2,366,000
|
|
Total accounts payable and other liabilities - Justice
|
|
$
|
8,116,000
|
|
|
$
|
11,298,000
|
|
NOTE
12 – SUBSEQUENT EVENTS
On
April 9, 2020, Justice entered into a loan agreement (“SBA Loan”) with CIBC Bank USA under the recently enacted Coronavirus
Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration. The Company
received proceeds of $4,719,000 from the SBA Loan. In accordance with the requirements of the CARES Act, the Company will use
proceeds from the SBA Loan primarily for payroll costs. The SBA Loan is scheduled to mature on April 9, 2022 and has a 1.00% interest
rate and is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under
the CARES Act. The loan may be forgiven if the funds are used for payroll and other qualified expenses. New guidance on the
criteria for forgiveness continues to be released.