UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2019

or

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to_________

 

Commission File Number 1-10324

 

THE INTERGROUP CORPORATION

(Exact name of registrant as specified in its charter)

 

DELAWARE   13-3293645
(State or other jurisdiction of   (I.R.S. Employer
Incorporation or organization)   Identification No.)

 

12121 Wilshire Boulevard, Suite 610, Los Angeles, California 90025

(Address of principal executive offices) (Zip Code)

 

(310) 889-2500

(Registrant’s telephone number, including area code)

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

[X] Yes [  ] No

 

Indicate by check mark whether the registrant has submitted electronically 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).

[X] Yes [  ] No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

 

  Large accelerated filer [  ] Accelerated filer [  ]
     
  Non-accelerated filer [  ] Smaller reporting company [X]
     
    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 Act):

[  ] Yes [X] No

 

Securities registered pursuant to section 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 January 24, 2020 was 2,299,422.

 

 

 

 
 

 

TABLE OF CONTENTS

 

  PART I – FINANCIAL INFORMATION Page
     
Item 1. Financial Statements.  
     
  Condensed Consolidated Balance Sheets as of December 31, 2019 and June 30, 2019 (Unaudited) 3
  Condensed Consolidated Statements of Operations for the Three Months ended December 31, 2019 and 2018 (Unaudited) 4
  Condensed Consolidated Statements of Operations for the Six Months ended December 31, 2019 and 2018 (Unaudited) 5
  Condensed Consolidated Statements of Shareholders’ Deficit for the Six Months ended December 31, 2019 and 2018 (Unaudited) 6
  Condensed Consolidated Statements of Cash Flows for the Six Months ended December 31, 2019 and 2018 (Unaudited) 7
  Notes to the Condensed Consolidated Financial Statements 8-19
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 20-26
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 27
     
Item 4. Controls and Procedures. 27
     
  PART II – OTHER INFORMATION  
Item 1. Legal Proceedings. 27
     
Item 1A. Risk Factors. 27
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 27
     
Item 3. Defaults Upon Senior Securities. 27
     
Item 4. Mine Safety Disclosures. 27
     
Item 5. Other Information. 27
     
Item 6. Exhibits. 28
     
Signatures 29

 

 -2-
 

 

PART I

FINANCIAL INFORMATION

 

Item 1 - Condensed Consolidated Financial Statements

 

THE INTERGROUP CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

As of  December 31, 2019   June 30, 2019 
ASSETS          
Investment in Hotel, net  $39,540,000   $39,836,000 
Investment in real estate, net   51,064,000    51,773,000 
Investment in marketable securities   8,148,000    9,696,000 
Other investments, net   564,000    612,000 
Cash and cash equivalents   8,456,000    11,837,000 
Restricted cash   14,884,000    13,295,000 
Other assets, net   2,464,000    2,362,000 
Deferred tax asset   1,097,000    1,468,000 
Total assets  $126,217,000   $130,879,000 
           
LIABILITIES AND SHAREHOLDERS’ DEFICIT          
Liabilities:          
Accounts payable and other liabilities - Justice  $8,647,000   $11,298,000 
Accounts payable and other liabilities   4,054,000    3,766,000 
Due to securities broker   2,355,000    1,629,000 
Obligations for securities sold   16,000    1,225,000 
Related party and other notes payable   4,950,000    5,261,000 
Finance leases   1,282,000    1,486,000 
Line of credit payable   2,985,000    2,985,000 
Mortgage notes payable - Hotel, net   111,947,000    113,087,000 
Mortgage notes payable - real estate, net   57,812,000    58,571,000 
Total liabilities   194,048,000    199,308,000 
           
Shareholders’ deficit:          
Preferred stock, $.01 par value, 100,000 shares authorized; none issued   -    - 
Common stock, $.01 par value, 4,000,000 shares authorized; 3,404,982 and 3,404,982 issued; 2,299,422 and 2,309,962 outstanding, respectively   33,000    33,000 
Additional paid-in capital   10,166,000    10,342,000 
Accumulated deficit   (39,176,000)   (39,760,000)
Treasury stock, at cost, 1,105,560 and 1,095,020 shares, respectively   (14,693,000)   (14,347,000)
Total InterGroup shareholders’ deficit   (43,670,000)   (43,732,000)
Noncontrolling interest   (24,161,000)   (24,697,000)
Total shareholders’ deficit   (67,831,000)   (68,429,000)
           
Total liabilities and shareholders’ deficit  $126,217,000   $130,879,000 

 

The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.

 

 -3-
 

 

THE INTERGROUP CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

For the three months ended December 31,  2019   2018 
Revenues:          
Hotel  $14,901,000   $13,997,000 
Real estate   3,839,000    3,752,000 
Total revenues   18,740,000    17,749,000 
Costs and operating expenses:          
Hotel operating expenses   (11,730,000)   (11,236,000)
Real estate operating expenses   (2,089,000)   (1,866,000)
Depreciation and amortization expenses   (1,232,000)   (1,249,000)
General and administrative expenses   (581,000)   (479,000)
           
Total costs and operating expenses   (15,632,000)   (14,830,000)
           
Income from operations   3,108,000    2,919,000 
           
Other income (expense):          
Interest expense - mortgages   (2,330,000)   (2,405,000)
Net loss on marketable securities   (53,000)   (1,945,000)
Net loss on marketable securities - Comstock   (66,000)   (26,000)
Dividend and interest income   111,000    88,000 
Trading and margin interest expense   (241,000)   (193,000)
Total other expense, net   (2,579,000)   (4,481,000)
           
Income (loss) before income taxes   529,000    (1,562,000)
Income tax (expense) benefit   (149,000)   440,000 
Net income (loss)   380,000    (1,122,000)
Less: Net (income) loss attributable to the noncontrolling interest   (132,000)   95,000 
Net income (loss) attributable to InterGroup Corporation  $248,000   $(1,027,000)
           
Net income (loss) per share          
Basic  $0.17   $(0.48)
Diluted  $0.14     N/A  
           
Net income (loss) per share attributable to InterGroup Corporation          
Basic  $0.11   $(0.44)
Diluted  $0.09     N/A  
           
Weighted average number of basic common shares outstanding   2,302,748    2,327,007 
Weighted average number of diluted common shares outstanding   2,633,143     N/A  

 

The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.

 

 -4-
 

 

THE INTERGROUP CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

For the six months ended December 31,  2019   2018 
Revenues:          
Hotel  $30,330,000   $29,807,000 
Real estate   7,556,000    7,431,000 
Total revenues   37,886,000    37,238,000 
Costs and operating expenses:          
Hotel operating expenses   (23,078,000)   (22,046,000)
Real estate operating expenses   (4,039,000)   (3,878,000)
Depreciation and amortization expenses   (2,445,000)   (2,492,000)
General and administrative expenses   (1,341,000)   (1,122,000)
           
Total costs and operating expenses   (30,903,000)   (29,538,000)
           
Income from operations   6,983,000    7,700,000 
           
Other income (expense):          
Interest expense - mortgages   (4,727,000)   (4,970,000)
Net loss on marketable securities   (198,000)   (1,680,000)
Net loss on marketable securities - Comstock   (370,000)   (462,000)
Dividend and interest income   241,000    185,000 
Trading and margin interest expense   (534,000)   (497,000)
Total other expense, net   (5,588,000)   (7,424,000)
           
Income before income taxes   1,395,000    276,000 
Income tax expense   (371,000)   (270,000)
Net income   1,024,000    6,000 
Less: Net income attributable to the noncontrolling interest   (440,000)   (403,000)
Net income (loss) attributable to InterGroup Corporation  $584,000   $(397,000)
           
Net income per share          
Basic  $0.44   $0.003 
Diluted  $0.39   $0.002 
           
Net income (loss) per share attributable to InterGroup Corporation          
Basic  $0.25   $(0.17)
Diluted  $0.22     N/A  
           
Weighted average number of basic common shares outstanding   2,306,070    2,330,213 
Weighted average number of diluted common shares outstanding   2,636,465    2,657,008 

 

The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.

 

 -5-
 

 

THE INTERGROUP CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

(Unaudited)

 

           Additional           InterGroup       Total 
   Common Stock   Paid-in   Accumulated    Treasury   Shareholder’   Noncontrolling   Shareholder’ 
   Shares   Amount   Capital   Deficit   Stock   Deficit   Interest   Deficit 
                                 
Balance at July 1, 2019   3,404,982   $33,000   $10,342,000   $(39,760,000)  $(14,347,000)  $(43,732,000)  $(24,697,000)  $(68,429,000)
                                         
Net Income   -    -    -    336,000    -    336,000    308,000    644,000 
                                         
Stock options expense   -    -    8,000    -    -    8,000    -    8,000 
                                         
Investment in Santa Fe   -    -    (147,000)   -    -    (147,000)   74,000    (73,000)
                                         
Purchase of treasury stock   -    -    -    -    (156,000)   (156,000)   -    (156,000)
                                         
Balance at September 30, 2019   3,404,982    33,000    10,203,000    (39,424,000)   (14,503,000)   (43,691,000)   (24,315,000)   (68,006,000)
                                         
Net income   -    -    -    248 ,000    -    248,000    132,000    380,000 
                                         
Stock options expense   -    -    9,000    -    -    9,000    -    9,000 
                                         
Investment in Santa Fe   -    -    (46,000)   -    -    (46,000)   22,000    (24,000)
                                         
Purchase of treasury stock   -    -    -    -    (190,000)   (190,000)   -    (190,000)
                                         
Balance at December 31, 2019   3,404,982   $33,000   $10,166,000   $(39,176,000)  $(14,693,000)  $(43,670,000)  $(24,161,000)  $(67,831,000)

 

           Additional           InterGroup       Total 
   Common Stock   Paid-in   Accumulated    Treasury   Shareholder’   Noncontrolling   Shareholder’ 
   Shares   Amount   Capital   Deficit   Stock   Deficit   Interest   Deficit 
                                 
Balance at July 1, 2018   3,395,616   $33,000   $10,522,000   $(41,217,000)  $(13,268,000)  $(43,930,000)  $(26,037,000)  $(69,967,000)
                                         
Net Income   -    -    -    630,000    -    630,000    498,000    1,128,000 
                                         
Stock options expense   -    -    30,000    -    -    30,000    -    30,000 
                                         
Purchase of treasury stock   -    -    -    -    (198,000)   (198,000)   -    (198,000)
                                         
Balance at September 30, 2018   3,395,616    33,000    10,552,000    (40,587,000)   (13,466,000)   (43,468,000)   (25,539,000)   (69,007,000)
                                         
Net loss   -    -    -    (1,027,000)   -    (1,027,000)   (95,000)   (1,122,000)
                                         
Issuance of stock   9,366    -    -    -    -    -    -    - 
                                         
Stock options expense   -    -    29,000    -    -    29,000    -    29,000 
                                         
Investment in Santa Fe   -    -    (31,000)   -    -    (31,000)   16,000    (15,000)
                                         
Purchase of treasury stock   -    -    -    -    (266,000)   (266,000)   -    (266,000)
                                         
Balance at December 31, 2018   3,404,982   $33,000   $10,550,000   $(41,614,000)  $(13,732,000)  $(44,763,000)  $(25,618,000)  $(70,381,000)

 

The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.

 

 -6-
 

 

THE INTERGROUP CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

For the six months ended December 31,  2019   2018 
Cash flows from operating activities:          
Net income  $1,024,000   $6,000 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   2,417,000    2,461,000 
Deferred taxes   371,000    270,000 
Net unrealized loss on marketable securities   491,000    2,664,000 
Stock compensation expense   17,000    59,000 
Changes in operating assets and liabilities:          
Investment in marketable securities   1,057,000    3,591,000 
Other assets   (102,000)   449,000 
Accounts payable and other liabilities - Justice   (2,651,000)   (1,181,000)
Accounts payable and other liabilities   288,000    (84,000)
Due to securities broker   726,000    (1,475,000)
Obligations for securities sold   (1,209,000)   (1,935,000)
Net cash provided by operating activities   2,429,000    4,825,000 
           
Cash flows from investing activities:          
Payments for hotel investments   (909,000)   (583,000)
Payments for real estate investments   (531,000)   (399,000)
Payments for investment in Santa Fe   (97,000)   (15,000)
Proceeds from other investments   48,000    80,000 
Net cash used in investing activities   (1,489,000)   (917,000)
           
Cash flows from financing activities:          
Net payments of mortgage and other notes payable   (2,386,000)   (4,411,000)
Proceeds from line of credit   -    2,985,000 
Purchase of treasury stock   (346,000)   (464,000)
Net cash used in financing activities   (2,732,000)   (1,890,000)
           
Net (decrease) increase in cash, cash equivalents and restricted cash   (1,792,000)   2,018,000 
Cash, cash equivalents and restricted cash at the beginning of the period   25,132,000    17,511,000 
Cash, cash equivalents and restricted cash at the end of the period  $23,340,000   $19,529,000 
           
Supplemental information:          
Interest paid  $4,799,000   $5,081,000 
Taxes paid  $39,000   $265,000 

 

The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.

 

 -7-
 

 

THE INTERGROUP CORPORATION

NOTES TO 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 The InterGroup Corporation (“InterGroup” 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 InterGroup and the notes therein included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019. The December 31, 2019 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 six months ended December 31, 2019 are not necessarily indicative of results to be expected for the full fiscal year ending June 30, 2020.

 

Basic and diluted income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding. The computation of diluted income per share is similar to the computation of basic earnings per share except that the weighted-average number of common shares is increased to include the number of additional common shares that would have been outstanding if potential dilutive common shares had been issued. The Company’s only potentially dilutive common shares are stock options.

 

As of December 31, 2019, the Company had the power to vote 86.3% of the voting shares of Santa Fe Financial Corporation (“Santa Fe”), a public company (OTCBB: SFEF). This percentage includes the power to vote an approximately 4% interest in the common stock in Santa Fe owned by the Company’s Chairman and President pursuant to a voting trust agreement entered into on June 30, 1998.

 

Santa Fe’s primary business is conducted through the management of its 68.8% owned subsidiary, Portsmouth Square, Inc. (“Portsmouth”), a public company (OTCBB: PRSI). 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”). InterGroup also directly owns approximately 13.4% 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.

 

 -8-
 

 

In addition to the operations of the Hotel, the Company also generates income from the ownership, management and, when appropriate, sale of real estate. Properties include sixteen apartment complexes, 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. The Company also has an investment in unimproved real property. As of December 31, 2019, all of the Company’s residential and commercial rental properties are managed in-house.

 

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 six months ended December 31, 2019 and 2018 represent the income tax effect on the Company’s pretax income which includes its share in the net income of the Hotel.

 

Financial Condition and Liquidity

 

The Company’s cash flows are primarily generated from the ownership and management of real estate.

 

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 $92,914,000 and $93,746,000 as of December 31, 2019 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.

 

Effective as of 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 a certain net worth and liquidity. As of December 31, 2019, InterGroup is in compliance with both requirements.

 

In July 2018, InterGroup obtained a revolving $5,000,000 line of credit (“RLOC”) from CIBC Bank USA (“CIBC”). On July 31, 2018, $2,969,000 was drawn from the RLOC to pay off the mortgage note payable at Intergroup Woodland Village, Inc. (“Woodland Village”) and a new mortgage note payable was established at Woodland Village due to InterGroup for the amount drawn. Woodland Village holds a three-story apartment complex in Santa Monica, California and is 55.4% and 44.6% owned by Santa Fe and the Company, respectively. The RLOC carries a variable interest rate of 30-day LIBOR plus 3%. Interest is paid on a monthly basis. The RLOC and all accrued and unpaid interest were due in July 2019. In July 2019, the Company obtained a modification from CIBC which increased the RLOC by $3,000,000 and extended the maturity date from July 24, 2019 to July 23, 2020. The $2,969,000 mortgage due to InterGroup carries same terms as InterGroup’s RLOC.

 

 -9-
 

 

On August 31, 2018, $1,005,000 was drawn from the RLOC to pay off a mortgage note payable on a single-family house located in Los Angeles, California. On September 28, 2018, the Company obtained a new mortgage in the amount of $1,000,000 on the same property. The interest rate on the new loan is fixed at 4.75% per annum for the first five years and variable for the remaining of the term. The note matures in October 2048. Net proceeds of $995,000 received as a result of the refinance was used to pay down the RLOC.

 

The Hotel has continued to generate positive operating income. While the debt service requirements related to the loans may create some additional risk for the Company and its ability to generate cash flows in the future, management believes that cash flows from the operations of the Hotel and the garage will continue to be sufficient to meet all of the Partnership’s current and future obligations and financial requirements.

 

The Company has invested in short-term, income-producing instruments and in equity and debt securities when deemed appropriate. The Company’s marketable securities are classified as trading with unrealized gains and losses recorded through the consolidated statements of operations.

 

Management believes that its cash, marketable securities, and the cash flows generated from its real estate assets, will be adequate to meet the Company’s current and future obligations. Additionally, management believes there is significant appreciated value in the Hotel property to support additional borrowings, if necessary.

 

The following table provides a summary as of December 31, 2019, the Company’s material financial obligations which also including interest payments.

 

       6 Months   Year   Year   Year   Year     
  Total   2020   2021   2022   2023   2024   Thereafter 
Mortgage and subordinated notes payable  $170,968,000   $1,433,000   $12,483,000   $3,095,000   $37,812,000   $107,655,000   $8,490,000 
Other notes payable   9,217,000    585,000    3,991,000    1,022,000    744,000    567,000    2,308,000 
Interest   33,535,000    4,460,000    8,598,000    8,148,000    7,014,000    3,401,000    1,914,000 
Total  $213,720,000   $6,478,000   $25,072,000   $12,265,000   $45,570,000   $111,623,000   $12,712,000 

 

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.

 

 -10-
 

 

NOTE 2 – REVENUE

 

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 following table present our Hotel revenue disaggregated by revenue streams.

 

For the three months ended December 31,  2019   2018 
Hotel revenues:          
Hotel rooms  $12,497,000   $11,565,000 
Food and beverage   1,425,000    1,565,000 
Garage   776,000    734,000 
Other operating departments   203,000    133,000 
Total hotel revenue  $14,901,000   $13,997,000 

 

For the six months ended December 31,  2019   2018 
Hotel revenues:          
Hotel rooms  $25,811,000   $25,087,000 
Food and beverage   2,647,000    3,014,000 
Garage   1,512,000    1,508,000 
Other operating departments   360,000    198,000 
Total hotel revenue  $30,330,000   $29,807,000 

 

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.

 

 -11-
 

 

Contract assets and liabilities

 

We do not have any material contract assets as of December 31, 2019 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 $1,027,000 as of December 31, 2019, from $1,215,000 as of June 30, 2019. The decrease for the six months ended December 31, 2019 was primarily driven by $188,000 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 and lease agreements do not extend beyond one year.

 

NOTE 3 – INVESTMENT IN HOTEL, NET

 

Investment in hotel consisted of the following as of:

 

       Accumulated   Net Book 
December 31, 2019  Cost   Depreciation   Value 
             
Land  $2,738,000   $-   $2,738,000 
Finance lease ROU assets   1,746,000    (137,000)   1,609,000 
Furniture and equipment   30,268,000    (27,206,000)   3,062,000 
Building and improvements   63,879,000    (31,748,000)   32,131,000 
Investment in Hotel, net  $98,631,000   $(59,091,000)  $39,540,000 

 

       Accumulated   Net Book 
June 30, 2019  Cost   Depreciation   Value 
             
Land  $2,738,000   $-   $2,738,000 
Finance lease ROU assets   521,000    (35,000)   486,000 
Furniture and equipment   30,585,000    (26,842,000)   3,743,000 
Building and improvements   63,879,000    (31,010,000)   32,869,000 
Investment in Hotel, net  $97,723,000   $(57,887,000)  $39,836,000 

 

NOTE 4 – INVESTMENT IN REAL ESTATE, NET

 

The Company’s investment in real estate includes sixteen apartment complexes, 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. The Company also has an investment in unimproved real property. Investment in real estate consisted of the following:

 

As of  December 31, 2019   June 30, 2019 
Land  $23,566,000   $23,566,000 
Buildings, improvements and equipment   68,899,000    68,369,000 
Accumulated depreciation   (42,869,000)   (41,629,000)
    49,596,000    50,306,000 
Land held for development   1,468,000    1,467,000 
Investment in real estate, net  $51,064,000   $51,773,000 

 

 -12-
 

 

 

NOTE 5 – INVESTMENT IN MARKETABLE SECURITIES

 

The Company’s investment in marketable securities consists primarily of corporate equities. The Company has also periodically invested in corporate bonds and income producing securities, which may include interests in real estate-based companies and REITs, where financial benefit could transfer to its shareholders through income and/or capital gain.

 

At December 31, 2019 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 December 31, 2019                
Corporate                    
Equities  $10,576,000  $1,672,000   $(4,100,000)  $(2,428,000)  $8,148,000 
                          
As of June 30, 2019                      
Corporate                         
Equities  $19,204,000   $1,753,000   $(11,261,000)  $(9,508,000)  $9,696,000 

 

As of December 31, 2019, and June 30, 2019, approximately 4% and 7%, respectively, of the investment in marketable securities balance above is comprised of the common stock of Comstock Mining Inc (“Comstock”). As of December 31, 2019, and June 30, 2019, the Company had $3,845,000 and $11,088,000, respectively, of unrealized losses related to securities held for over one year; of which $3,684,000 and $10,900,000 are related to its investment in Comstock, respectively. For the six months ended December 31, 2019, the decrease in unrealized losses is a result of reclassing $7,586,000 of 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 loss on marketable securities for the three and six months ended December 31, 2019 and 2018, respectively:

 

For the three months ended December 31,  2019   2018 
Realized (loss) gain on marketable securities, net  $(3,000)  $530,000 
Unrealized loss on marketable securities, net   (50,000)   (2,475,000)
Unrealized loss on marketable securities related to Comstock   (66,000)   (26,000)
Net loss on marketable securities  $(119,000)  $(1,971,000)

 

For the six months ended December 31,  2019   2018 
Realized (loss) gain on marketable securities, net  $(77,000)  $522,000 
Unrealized loss on marketable securities, net   (121,000)   (2,202,000)
Unrealized loss on marketable securities related to Comstock   (370,000)   (462,000)
Net loss on marketable securities  $(568,000)  $(2,142,000)

 

 -13-
 

 

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 also include non-marketable warrants carried at fair value.

 

Other investments, net consist of the following:

 

Type  December 31, 2019   June 30, 2019 
Private equity hedge fund, at cost  $376,000   $376,000 
Other preferred stock, at cost   188,000    236,000 
   $564,000   $612,000 

 

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 and obligations for securities sold) 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:

 

  12/31/2019   06/30/2019 
As of  Total - Level 1   Total - Level 1 
Assets:        
Investment in marketable securities:          
REITs and real estate companies  $3,263,000   $3,069,000 
Energy   1,278,000    950,000 
Insurance   1,109,000    - 
Corporate bonds   883,000    1,420,000 
Consumer cyclical   572,000    1,448,000 
Basic material   546,000    829,000 
Financial services   278,000    951,000 
Technology   149,000    651,000 
Industrials   70,000    193,000 
Healthcare   -    185,000 
   $8,148,000   $9,696,000 

 

The fair values of investments in marketable securities are determined by the most recently traded price of each security at the balance sheet date.

 

 -14-
 

 

Financial assets that are measured at fair value on a non-recurring basis and are not included in the tables above include “Other investments in 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   December 31, 2019   Net loss for the
six months ended December 31, 2019
 
             
Other non-marketable investments  $564,000   $564,000   $        - 

 

Assets  Level 3   June 30, 2019   Net loss for the
six months ended
December 31, 2018
 
                
Other non-marketable investments  $612,000   $612,000   $        - 

 

For the six months ended December 31, 2019 and 2018, we received distribution from other non-marketable investments of $48,000 and $80,000, 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  12/31/2019   06/30/2019 
         
Cash and cash equivalents  $8,456,000   $11,837,000 
Restricted cash   14,884,000    13,295,000 
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows  $23,340,000   $25,132,000 

 

Restricted cash is comprised of amounts held by lenders for payment of real estate taxes, insurance, replacement and capital addition reserves. It also includes key money received from Interstate that is restricted for capital improvements for the Hotel.

 

NOTE 9 – STOCK BASED COMPENSATION PLANS

 

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 16 – Stock Based Compensation Plans in the Company’s Form 10-K for the year ended June 30, 2019 for more detailed information on the Company’s stock-based compensation plans.

 

During the three months ended December 31, 2019 and 2018, the Company recorded stock option compensation cost of $9,000 and $29,000, respectively, related to stock options that were previously issued. During the six months ended December 31, 2019 and 2018, the Company recorded stock option compensation cost of $17,000 and $59,000, respectively, related to stock options that were previously issued. As of December 31, 2019, there was a total of $28,000 of unamortized compensation related to stock options which is expected to be recognized over the weighted-average period of 2.17 years.

 

In December 2018, the Company’s President and Chief Executive Officer, John V. Winfield exercised 26,805 vested Incentive Stock Options by surrendering 17,439 shares of the Company’s common stock at fair value as payment of the exercise price, resulting in a net issuance to him of 9,366 shares. No additional compensation expense was recorded related to the issuance.

 

 -15-
 

 

Option-pricing models require the input of various subjective assumptions, including the option’s expected life 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.

 

The following table summarizes the stock options activity from July 1, 2018 through December 31, 2019:

 

   Number of   Weighted Average   Weighted Average   Aggregate 
   Shares   Exercise Price   Remaining Life   Intrinsic Value 
                 
Oustanding at July 1, 2018   368,000   $17.21    4.17   $3,505,000 
Granted   -    -           
Exercised   (26,805)   20.52           
Forfeited   -    -           
Exchanged   -    -           
Outstanding at June 30, 2019   341,195   $16.95    3.07 years   $4,680,000 
Exercisable at June 30, 2019   330,395   $16.62    2.92 years   $4,643,000 
Vested and Expected to vest at June 30, 2019   341,195   $16.95    3.07 years   $4,680,000 
                     
Oustanding at July 1, 2019   341,195   $16.95    3.07 years   $4,680,000 
Granted   -    -           
Exercised   -    -           
Forfeited   -    -           
Exchanged   -    -           
Outstanding at December 31, 2019   341,195   $16.95    2.57 years   $6,993,000 
Exercisable at December 31, 2019   330,395   $16.62    2.42 years   $6,883,000 
Vested and Expected to vest at December 31, 2019   341,195   $16.95    2.57 years   $6,993,000 

 

NOTE 10 – SEGMENT 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 six months ended December 31, 2019 and 2018. Operating income from hotel operations consist of the operation of the hotel and operation of the garage. Operating income for rental properties consists of rental income. Operating loss for investment transactions consist of net investment gains (losses), impairment loss on other investments, net unrealized gain (loss) on other investments, dividend and interest income and trading and margin interest expense. The other segment consists of corporate general and administrative expenses and the income tax expense for the entire Company.

 

 -16-
 

 

As of and for the three months  Hotel   Real Estate   Investment         
ended December 31, 2019  Operations   Operations   Transactions   Corporate   Total 
Revenues  $14,901,000   $3,839,000   $-   $-   $18,740,000 
Segment operating expenses   (11,730,000)   (2,089,000)   -    (581,000)   (14,400,000)
Segment income (loss) from operations   3,171,000    1,750,000    -    (581,000)   4,340,000 
Interest expense - mortgage   (1,735,000)   (595,000)   -    -    (2,330,000)
Depreciation and amortization expense   (611,000)   (621,000)   -    -    (1,232,000)
Loss from investments   -    -    (249,000)   -    (249,000)
Income tax expense   -    -    -    (149,000)   (149,000)
Net income (loss)  $825,000   $534,000   $(249,000)  $(730,000)  $380,000 
Total assets  $59,981,000   $51,064,000   $8,712,000   $6,460,000   $126,217,000 

 

For the three months  Hotel   Real Estate   Investment         
ended December 31, 2018  Operations   Operations   Transactions   Corporate   Total 
Revenues  $13,997,000   $3,752,000   $-   $-   $17,749,000 
Segment operating expenses   (11,236,000)   (1,866,000)   -    (479,000)   (13,581,000)
Segment income (loss) from operations   2,761,000    1,886,000    -    (479,000)   4,168,000 
Interest expense - mortgage   (1,797,000)   (608,000)   -    -    (2,405,000)
Depreciation and amortization expense   (643,000)   (606,000)   -    -    (1,249,000)
Loss from investments   -    -    (2,076,000)   -    (2,076,000)
Income tax benefit   -    -    -    440,000    440,000 
Net income (loss)  $321,000   $672,000   $(2,076,000)  $(39,000)  $(1,122,000)

 

As of and for the six months  Hotel   Real Estate   Investment         
ended December 31, 2019  Operations   Operations   Transactions   Corporate   Total 
Revenues  $30,330,000   $7,556,000   $-   $-   $37,886,000 
Segment operating expenses   (23,078,000)   (4,039,000)   -    (1,341,000)   (28,458,000)
Segment income (loss) from operations   7,252,000    3,517,000    -    (1,341,000)   9,428,000 
Interest expense - mortgage   (3,527,000)   (1,200,000)   -    -    (4,727,000)
Depreciation and amortization expense   (1,204,000)   (1,241,000)   -    -    (2,445,000)
Loss from investments   -    -    (861,000)   -    (861,000)
Income tax expense   -    -    -    (371,000)   (371,000)
Net income (loss)  $2,521,000   $1,076,000   $(861,000)  $(1,712,000)  $1,024,000 
Total assets  $59,981,000   $51,064,000   $8,712,000   $6,460,000   $126,217,000 

 

For the six months  Hotel   Real Estate   Investment         
ended December 31, 2018  Operations   Operations   Transactions   Corporate   Total 
Revenues  $29,807,000   $7,431,000   $-   $-   $37,238,000 
Segment operating expenses   (22,046,000)   (3,878,000)   -    (1,122,000)   (27,046,000)
Segment income (loss) from operations   7,761,000    3,553,000    -    (1,122,000)   10,192,000 
Interest expense - mortgage   (3,611,000)   (1,359,000)   -    -    (4,970,000)
Depreciation and amortization expense   (1,285,000)   (1,207,000)   -    -    (2,492,000)
Loss from investments   -    -    (2,454,000)   -    (2,454,000)
Income tax expense   -    -    -    (270,000)   (270,000)
Net income (loss)  $2,865,000   $987,000   $(2,454,000)  $(1,392,000)  $6,000 

 

 -17-
 

 

NOTE 11 – RELATED PARTY AND OTHER FINANCING TRANSACTIONS

 

The following summarizes the balances of related party and other notes payable as of December 31, 2019 and June 30, 2019, respectively.

 

As of  12/31/2019   06/30/2019 
         
Note payable - Hilton  $3,167,000   $3,325,000 
Note payable - Interstate   1,771,000    1,896,000 
Other notes payable   12,000    40,000 
Total related party and other notes payable  $4,950,000   $5,261,000 

 

Note payable to Hilton (Franchisor) is a self-exhausting, interest free development incentive note which is reduced by approximately $316,000 annually through 2030 by Hilton if the Partnership is still a Franchisee with Hilton.

 

On February 1, 2017, Justice entered into an HMA with Interstate to manage the Hotel with an effective takeover date of February 3, 2017. The term of the management agreement is for an initial period of 10 years commencing on the takeover date and automatically renews for an additional year not to exceed five years in aggregate subject to certain conditions. The HMA also provides for Interstate to advance a key money incentive fee to the Hotel for capital improvements in the amount of $2,000,000 under certain terms and conditions described in a separate key money agreement. The key money contribution shall be amortized in equal monthly amounts over an eight (8) year period commencing on the second (2nd) anniversary of the takeover date. As of December 31, 2019, and June 30, 2019, balance of the key money plus accrued interest is $1,004,000 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 December 31, 2019, the Company had finance lease obligations outstanding of $1,282,000. These finance leases expire in various years through 2023 at rates ranging from 5.77% to 6.25% per annum. Minimum future lease payments for assets under finance leases as of December 31, 2019 are as follows:

 

For the year ending June 30,    
2020  $246,000 
2021   492,000 
2022   482,000 
2023   182,000 
Total minimum lease payments   1,402,000 
Less interest on finance lease   (120,000)
Present value of future minimum lease payments  $1,282,000 

 

Future minimum principal payments for all related party and other financing transactions are as follows:

 

For the year ending June 30,     
2020  $585,000 
2021   3,991,000 
2022   1,022,000 
2023   744,000 
2024   567,000 
Thereafter   2,308,000 
   $9,217,000 

 

 -18-
 

 

In July 2018, InterGroup obtained a revolving $5,000,000 line of credit (“RLOC”) from CIBC Bank USA (“CIBC”). On July 31, 2018, $2,969,000 was drawn from the RLOC to pay off the mortgage note payable at Intergroup Woodland Village, Inc. (“Woodland Village”) and a new mortgage note payable was established at Woodland Village due to InterGroup for the amount drawn. Woodland Village holds a three-story apartment complex in Santa Monica, California and is 55.4% and 44.6% owned by Santa Fe and the Company, respectively. The RLOC carries a variable interest rate of 30-day LIBOR plus 3%. Interest is paid on a monthly basis. The RLOC and all accrued and unpaid interest were due in July 2019. In July 2019, the Company obtained a modification from CIBC which increased the RLOC by $3,000,000 and extended the maturity date from July 24, 2019 to July 23, 2020. The $2,969,000 mortgage due to InterGroup carries same terms as InterGroup’s RLOC.

 

Effective May 12, 2017, InterGroup agreed to become an additional guarantor under the limited guaranty and an additional indemnitor under environmental indemnity for Justice Investors limited partnership’s $97,000,000 mortgage loan and the $20,000,000 mezzanine loan, in order to maintain certain minimum net worth and liquidity guarantor covenant requirements that Portsmouth was unable to satisfy independently as of March 31, 2017.

 

Four of the Portsmouth directors serve as directors of InterGroup. Two of those directors also serve as directors of Santa Fe. The two Santa Fe directors also serve as directors of InterGroup.

 

As Chairman of the 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 Portsmouth and Santa Fe and oversees the investment activity of those companies. Depending on certain market conditions and various risk factors, the Chief Executive Officer, Portsmouth and Santa Fe 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 the Portsmouth and Santa Fe, 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 - JUSTICE

 

The following summarizes the balances of accounts payable and other liabilities – Justice as of December 31, 2019 and June 30, 2019.

 

 

As of  12/31/2019   06/30/2019 
         
Trade payable  $1,953,000   $1,792,000 
Advance deposits   1,027,000    1,215,000 
Property tax payable   1,046,000    1,046,000 
Payroll and related accruals   1,826,000    2,584,000 
Interest payable   -    412,000 
Withholding and other taxes payable   882,000    1,831,000 
Security deposit   52,000    52,000 
Other payables   1,861,000    2,366,000 
Total accounts payable and other liabilities - Justice  $8,647,000   $11,298,000 

 

NOTE 13 – ACCOUNTS PAYABLE AND OTHER LIABILITIES

 

The following summarizes the balances of accounts payable and other liabilities as of December 31, 2019 and June 30, 2019.

 

As of  12/31/2019   06/30/2019 
         
Trade payable  $560,000   $521,000 
Advance deposits   324,000    378,000 
Property tax payable   935,000    595,000 
Payroll and related accruals   49,000    47,000 
Interest payable   223,000    221,000 
Withholding and other taxes payable   1,069,000    1,108,000 
Security deposit   743,000    736,000 
Other payables   151,000    160,000 
Total accounts payable and other liabilities  $4,054,000   $3,766,000 

 

NOTE 14 – SUBSEQUENT EVENTS

 

Management has evaluated subsequent events through the date these financial statements were available to be issued. Based on our evaluation no material events have occurred that require disclosure.

 

 -19-
 

 

Item 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD-LOOKING STATEMENTS AND PROJECTIONS

 

The Company may from time to time make forward-looking statements and projections concerning future expectations. When used in this discussion, the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “may,” “could,” “will”, “would” and similar expressions, are intended to identify forward-looking statements. These statements are subject to certain risks and uncertainties, such as national and worldwide economic conditions, including the impact of recessionary conditions on tourism, travel and the lodging industry, the impact of terrorism and war on the national and international economies, including tourism and securities markets, energy and fuel costs, natural disasters, general economic conditions and competition in the hotel industry in the San Francisco area, seasonality, labor relations and labor disruptions, actual and threatened pandemics such as swine flu, partnership distributions, the ability to obtain financing at favorable interest rates and terms, securities markets, regulatory factors, litigation and other factors discussed below in this Report and in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019, that could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as to the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

RESULTS OF OPERATIONS

 

As of December 31, 2019, the Company owned approximately 82.3% of the common shares of its subsidiary, Santa Fe and Santa Fe owned approximately 68.8% of the common shares of Portsmouth Square, Inc. InterGroup also directly owns approximately 13.4% of the common shares of Portsmouth. The Company’s principal source of revenue continues to be derived from the general and limited partnership interests of its subsidiary, Portsmouth, in the Justice Investors limited partnership (“Justice” or the “Partnership”) inclusive of hotel room revenue, food and beverage revenue, garage revenue, and revenue from other operating departments. The Company also generates income from its investments in real estate properties and from investment of its cash and securities assets. Justice owns the Hotel and related facilities, including a five-level underground parking garage. The financial statements of Justice have been consolidated with those of the Company.

 

The Hotel is operated by the Partnership as a full-service Hilton brand hotel pursuant to a Franchise License Agreement (the “License Agreement”) with Hilton. The Partnership entered into the License Agreement on December 10, 2004. The term of the License Agreement was for an initial period of 15 years commencing on the opening date, with an option to extend the License Agreement for another five years, subject to certain conditions. On June 26, 2015, the Partnership and Hilton entered into an amended franchise agreement which extended the License Agreement through 2030, modified the monthly royalty rate, extended geographic protection to the Partnership and also provided the Partnership certain key money cash incentives to be earned through 2030. The key money cash incentives were received on July 1, 2015.

 

 -20-
 

 

On February 1, 2017, Justice entered into an HMA with Interstate to manage the Hotel and related facilities with an effective takeover date of February 3, 2017. The term of HMA is for an initial period of ten 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.

 

In addition to the operations of the Hotel, the Company also generates income from the ownership and management of real estate. Properties include sixteen apartment complexes, one commercial real estate property, and three single-family 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. All of the Company’s residential and commercial rental operating properties are managed in-house.

 

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 December 31, 2019 Compared to Three Months Ended December 31, 2018

 

The Company had net income of $380,000 for the three months ended December 31, 2019 compared to net loss of $1,122,000 for the three months ended December 31, 2018. The change is primarily attributable to the decrease in loss on marketable securities.

 

Hotel Operations

 

The Company had net income from Hotel operations of $825,000 for the three months ended December 31, 2019 compared to net income of $321,000 for the three months ended December 31, 2018. The change is primarily attributable to the increase in Hotel revenue, offset by the rise of Hotel operating expenses.

 

The following table sets forth a more detailed presentation of Hotel operations for the three months ended December 31, 2019 and 2018.

 

 

For the three months ended December 31,  2019   2018 
Hotel revenues:          
Hotel rooms  $12,497,000   $11,565,000 
Food and beverage   1,425,000    1,565,000 
Garage   776,000    734,000 
Other operating departments   203,000    133,000 
Total hotel revenues   14,901,000    13,997,000 
Operating expenses excluding depreciation and amortization   (11,730,000)   (11,236,000)
Operating income before interest, depreciation and amortization   3,171,000    2,761,000 
Interest expense - mortgage   (1,735,000)   (1,797,000)
Depreciation and amortization expense   (611,000)   (643,000)
Net income from Hotel operations  $825,000   $321,000 

 

For the three months ended December 31, 2019, the Hotel had operating income of $3,171,000 before interest expense, depreciation and amortization on total operating revenues of $14,901,000 compared to operating income of $2,761,000 before interest expense, depreciation and amortization on total operating revenues of $13,997,000 for the three months ended December 31, 2018. Hotel room revenue rose by $932,000 for the three months ended December 31, 2019 compared to the three months ended December 31, 2018. The increase is primarily due to the timing of Dreamforce, one of the largest annual citywide conventions in San Francisco, from September in 2018 to November in 2019. Food and beverage revenue decreased by $140,000 primarily due to decrease in banquet and catering revenue as room revenue shifted towards the transient segment from groups with banquet and catering spending. Revenue from garage increased by $42,000 as a result of the increase in occupancy and monthly parkers. Other operating departments revenue increased by $70,000 primarily due to increase in group cancellation revenue.

 

Total operating expenses increased by $494,000 primarily due to annual wage increase per union bargaining agreements.

 

 -21-
 

 

The following table sets forth the average daily room rate, average occupancy percentage and RevPAR of the Hotel for the three months ended December 31, 2019 and 2018.

 

Three Months 

Ended December 31,

  

Average 

Daily Rate

  

Average

Occupancy %

  

  

RevPAR

 
 2019   $255    98%  $250 
 2018   $239    97%  $232 

 

The Hotel’s revenues increased by 6.5% this quarter as compared to the previous comparable quarter. Average daily rate increased by $16, average occupancy increased by 1%, and RevPAR increased by $18 for the three months ended December 31, 2019 compared to the three months ended December 31, 2018.

 

Real Estate Operations

 

Net income from real estate operations for the three months ended December 31, 2019, decreased by $138,000 compared to the three months ended December 31, 2018, due to an increase in payroll and repairs and maintenance. All of Company’s properties are managed in-house. 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.

 

Investment Transactions

 

The Company had a net loss on marketable securities of $119,000 for the three months ended December 31, 2019 compared to a net loss on marketable securities of $1,971,000 for the three months ended December 31, 2018. For the three months ended December 31, 2019, the Company had a net realized loss of $3,000 and a net unrealized loss of $116,000. For the three months ended December 31, 2018, the Company had a net realized gain of $530,000 and a net unrealized loss of $2,501,000.

 

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.

 

The Company and its subsidiaries, Portsmouth and Santa Fe, compute and file income tax returns and prepare discrete income tax provisions for financial reporting. The income tax expense (benefit) during the three months ended December 31, 2019, and 2018 represents primarily the income tax effect of the pretax income (loss) at InterGroup and the pretax income of Portsmouth, which includes its share in net income of the Hotel.

 

Six Months Ended December 31, 2019 Compared to Six Months Ended December 31, 2018

 

The Company had net income of $1,024,000 for the six months ended December 31, 2019 compared to net income of $6,000 for the six months ended December 31, 2018. The increase in net income is primarily attributable to a decrease in loss on marketable securities, the rise in Hotel revenue, offset by the increase in Hotel operating expenses.

 

Hotel Operations

 

The Company had net income from Hotel operations of $2,521,000 for the six months ended December 31, 2019 compared to net income of $2,865,000 for the six months ended December 31, 2018. The change is primarily attributable to the rise in Hotel operating expenses, offset by the increase in Hotel revenue.

 

 -22-
 

 

The following table sets forth a more detailed presentation of Hotel operations for the six months ended December 31, 2019 and 2018.

 

For the six months ended December 31,  2019   2018 
Hotel revenues:          
Hotel rooms  $25,811,000   $25,087,000 
Food and beverage   2,647,000    3,014,000 
Garage   1,512,000    1,508,000 
Other operating departments   360,000    198,000 
Total hotel revenues   30,330,000    29,807,000 
Operating expenses excluding depreciation and amortization   (23,078,000)   (22,046,000)
Operating income before interest, depreciation and amortization   7,252,000    7,761,000 
Interest expense - mortgage   (3,527,000)   (3,611,000)
Depreciation and amortization expense   (1,204,000)   (1,285,000)
Net income from Hotel operations  $2,521,000   $2,865,000 

 

For the six months ended December 31, 2019, the Hotel had operating income of $7,252,000 before interest expense, depreciation and amortization on total operating revenues of $30,330,000 compared to operating income of $7,761,000 before interest expense, depreciation and amortization on total operating revenues of $29,807,000 for the six months ended December 31, 2018. Hotel room revenue rose by $724,000 for the six months ended December 31, 2019 compared to the six months ended December 31, 2018. The increase is primarily due to replacing guaranteed room revenue at low rates with room revenue at higher market rates driven by citywide conventions. Food and beverage revenue decreased by $367,000 primarily due to decrease in banquet and catering revenue as room revenue shifted towards the transient segment from groups with banquet and catering spending. Garage revenue remained consistent year over year. Revenue from other operating departments increased by $162,000 primarily due to increase in group cancellation revenue.

 

Total operating expenses increased by $1,032,000 primarily due to annual wage increase per union bargaining agreements.

 

The following table sets forth the average daily room rate, average occupancy percentage and RevPAR of the Hotel for the six months ended December 31, 2019 and 2018.

 

Six months

Ended December 31,

  

Average

Daily Rate

  

Average

Occupancy %

  

 

RevPAR

 
              
 2019   $263    98%  $258 
 2018   $258    97%  $250 

 

The Hotel’s revenues increased by 1.8% for the six months ended December 31, 2019, as compared to the six months ended December 31, 2018. Average daily rate increased by $5, average occupancy increased by 1%, and RevPAR increased by $8 for the six months ended December 31, 2019, compared to the six months ended December 31, 2018.

 

Real Estate Operations

 

Net income from real estate operations for the six months ended December 31, 2019 increased by $89,000 compare to the six months ended December 31, 2018 due to reduction in mortgage interest. All of Company’s properties are managed in-house. 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.

 

Investment Transactions

 

The Company had a net loss on marketable securities of $568,000 for the six months ended December 31, 2019 compared to a net loss on marketable securities of $2,142,000 for the six months ended December 31, 2018. For the six months ended December 31, 2019, the Company had a net realized loss of $77,000 and a net unrealized loss of $491,000. For the six months ended December 31, 2018, the Company had a net realized gain of $522,000 and a net unrealized loss of $2,664,000.

 

 -23-
 

 

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.

 

The Company and its subsidiaries, Portsmouth and Santa Fe, compute and file income tax returns and prepare discrete income tax provisions for financial reporting. The income tax expense during the six months ended December 31, 2019 and 2018 represents primarily the income tax effect of the pretax income at InterGroup and the pretax income of Portsmouth, which includes its share in net income of the Hotel.

 

MARKETABLE SECURITIES

 

The following table shows the composition of the Company’s marketable securities portfolio as of December 31, 2019 and June 30, 2019 by selected industry groups.

  

       % of Total 
As of December 31, 2019      Investment 
Industry Group  Fair Value   Securities 
         
REIT’s and real estate ompanies  $3,263,000    40.1%
Energy   1,278,000    15.7%
Insurance   1,109,000    13.6%
Corporate bonds   883,000    10.8%
Consumer cyclical   572,000    7.0%
Basic material   546,000    6.7%
Financial services   278,000    3.4%
Technology   149,000    1.8%
Industrials   70,000    0.9%
   $8,148,000    100.0%

 

       % of Total 
As of June 30, 2019      Investment 
Industry Group  Fair Value   Securities 
         
REITs and real estate companies  $3,069,000    31.8%
Consumer cyclical   1,448,000    14.9%
Corporate bonds   1,420,000    14.6%
Financial   951,000    9.8%
Energy   950,000    9.8%
Basic material   829,000    8.5%
Technology   651,000    6.7%
Industrials   193,000    2.0%
Healthcare   185,000    1.9%
   $9,696,000    100.0%

 

As of December 31, 2019, the Company’s investment portfolio includes approximately 34 equity positions. The Company holds three equity securities that comprised more than 10% of the equity value of the portfolio. The largest security position represents 27% 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’ industry group.

 

As of June 30, 2019, the Company’s investment portfolio includes approximately 29 equity positions. The Company holds three equity securities that comprised more than 10% of the equity value of the portfolio. The largest security position represents 18% 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’ industry group.

 

 -24-
 

 

The following table shows the net gain or loss on the Company’s marketable securities and the associated margin interest and trading expenses for the respective periods:

 

For the three months ended December 31,  2019   2018 
Net loss on marketable securities  $(119,000)  $(1,971,000)
Dividend and interest income   111,000    88,000 
Margin interest expense   (116,000)   (132,000)
Trading and management expenses   (125,000)   (61,000)
Net loss from investment transactions  $(249,000)  $(2,076,000)

 

For the six months ended December 31,  2019   2018 
Net loss on marketable securities  $(568,000)  $(2,142,000)
Dividend and interest income   241,000    185,000 
Margin interest expense   (252,000)   (288,000)
Trading and management expenses   (282,000)   (209,000)
Net loss from investment transactions  $(861,000)  $(2,454,000)

 

FINANCIAL CONDITION AND LIQUIDITY

 

The Company’s cash flows are primarily generated from its Hotel and real estate operations. The Company may also receive cash from its investment in marketable securities and other investments.

 

To fund the redemption of limited partnership interests and to repay the prior mortgage, Justice obtained a $97,000,000 mortgage loan and a $20,000,000 mezzanine loan in December of 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 and matures in January 2024. Outstanding principal balance on the loan was $92,914,000 and $93,746,000 as of December 31, 2019 and June 30, 2019, respectively. As additional security for the mortgage loan, there is a limited guaranty executed by the Portsmouth in favor of the mortgage lender. The mezzanine loan is a secured by the Operating membership interest held by Mezzanine and is subordinated to the Mortgage Loan. The mezzanine interest only loan 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. Effective as of May 12, 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. 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 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.

 

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 June 30, 2020. The balance of this loan was $3,000,000 as of December 31, 2019 and June 30, 2019, and is eliminated in the condensed consolidated balance sheets.

 

In July 2018, InterGroup obtained a revolving $5,000,000 line of credit (“RLOC”) from CIBC Bank USA (“CIBC”). On July 31, 2018, $2,969,000 was drawn from the RLOC to pay off the mortgage note payable at Intergroup Woodland Village, Inc. (“Woodland Village”) and a new mortgage note payable was established at Woodland Village due to InterGroup for the amount drawn. Woodland Village holds a three-story apartment complex in Santa Monica, California and is 55.4% and 44.6% owned by Santa Fe and the Company, respectively. The RLOC carries a variable interest rate of 30-day LIBOR plus 3%. Interest is paid on a monthly basis. The RLOC and all accrued and unpaid interest were due in July 2019. In July 2019, the Company obtained a modification from CIBC which increased the RLOC by $3,000,000 and extended the maturity date from July 24, 2019 to July 23, 2020. The $2,969,000 mortgage due to InterGroup carries same terms as InterGroup’s RLOC.

 

 -25-
 

 

On August 31, 2018, $1,005,000 was drawn from the RLOC to pay off a mortgage note payable on a single-family house located in Los Angeles, California. On September 28, 2018, the Company obtained a new mortgage in the amount of $1,000,000 on the same property. The interest rate on the new loan is fixed at 4.75% per annum for the first five years and variable for the remaining of the term. The note matures in October 2048. Net proceeds of $995,000 received as a result of the refinance was used to pay down the RLOC.

 

Despite an uncertain economy, the Hotel has continued to generate positive operating income. While the debt service requirements related to the loans may create some additional risk for the Company and its ability to generate cash flows in the future, management believes that cash flows from the operations of the Hotel and the garage will continue to be sufficient to meet all of the Partnership’s current and future obligations and financial requirements.

 

The Company has invested in short-term, income-producing instruments and in equity and debt securities when deemed appropriate. The Company’s marketable securities are classified as trading with unrealized gains and losses recorded through the consolidated statements of operations.

 

Management believes that its cash, marketable securities, and the cash flows generated from those assets and from the partnership management fees, will be adequate to meet the Company’s current and future obligations. Additionally, management believes there is significant appreciated value in the Hotel property to support additional borrowings, if necessary.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

The Company has no off balance sheet arrangements.

 

MATERIAL CONTRACTUAL OBLIGATIONS

 

The following table provides a summary as of December 31, 2019, the Company’s material financial obligations which also including interest payments.

 

       6 Months   Year   Year   Year   Year     
   Total   2020   2021   2022   2023   2024   Thereafter 
Mortgage and subordinated notes payable  $170,968,000   $1,433,000   $12,483,000   $3,095,000   $37,812,000   $107,655,000   $8,490,000 
Other notes payable   9,217,000    585,000    3,991,000    1,022,000    744,000    567,000    2,308,000 
Interest   33,535,000    4,460,000    8,598,000    8,148,000    7,014,000    3,401,000    1,914,000 
Total  $213,720,000   $6,478,000   $25,072,000   $12,265,000   $45,570,000   $111,623,000   $12,712,000 

 

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 Interstate has the power and ability to adjust hotel room rates on an ongoing basis, there should be minimal impact on partnership revenues due to inflation. Partnership revenues are also subject to interest rate risks, which may be influenced by inflation. For the two most recent fiscal years, the impact of inflation on the Company’s income is not viewed by management as material.

 

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.

 

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

 

Critical accounting policies are those that are most significant to the presentation 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 condensed financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to the consolidation of our subsidiaries, to our revenues, allowances for bad debts, accruals, asset impairments, other investments, income taxes and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions. There have been no material changes to the Company’s critical accounting policies during the six months ended December 31, 2019 except for the adoption of ASU 2016-02. Please refer to the Company’s Annual Report on Form 10-K for the year ended June 30, 2019 for a summary of the critical accounting policies.

 

 -26-
 

 

Item 3. Quantitative and Qualitative Disclosures about 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 Procedures.

 

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

 

The Company’s management, with the participation of the Company’s Chief Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, the Chief Executive Officer and Principal Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed in this filing is accumulated and communicated to management and is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

 

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

There have been no changes in the Company’s internal control over financial reporting during the last quarterly period

 

covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II. 

OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

 

During the period ending December 31, 2019, there were no pending or threatened legal actions.

 

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.

 

 -27-
 

 

Item 6. EXHIBITS

 

31.1   Certification of Principal Executive Officer of Periodic Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
     
31.2   Certification of Principal Financial Officer of Periodic Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
     
32.1   Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350.
     
32.2   Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.

 

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

 

 -28-
 

 

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: January 24, 2020 by /s/ John V. Winfield
    John V. Winfield
    President, Chairman of the Board and
    Chief Executive Officer
    (Principal Executive Officer)
     
Date: January 24, 2020 by /s/ Danfeng Xu
    Danfeng Xu
    Treasurer and Controller
    (Principal Financial Officer)

 

 -29-
 

 

 

 

 

EXHIBIT 31.1

CERTIFICATION

 

I, John V. Winfield, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of The InterGroup Corporation;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing equivalent functions):

 

(a) All significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: January 24, 2020

 

/s/ John V. Winfield  
John V. Winfield  
President and Chief Executive Officer  
(Principal Executive Officer)  

 

 
 

 

 

EXHIBIT 31.2

CERTIFICATION

 

I, Danfeng Xu, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of The InterGroup Corporation;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing equivalent functions):

 

(a) All significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: January 24, 2020

 

/s/ Danfeng Xu  
Danfeng Xu  
Treasurer and Controller  
(Principal Financial Officer)  

 

 
 

 

 

EXHIBIT 32.1

 

Certification of Principal Executive Officer Pursuant to

18 U.S.C. Section 1350,

As Adopted Pursuant to

Section 906 of The Sarbanes-Oxley Act Of 2002

 

In connection with the Quarterly Report of The InterGroup Corporation (the “Company”) on Form 10-Q for the quarter ended December 31, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John V. Winfield, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

 

The Report fully complies with the requirements of Section 13(a) or 5(d) of the Securities Exchange Act of 1934; and
   
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ John V. Winfield   
John V. Winfield  
President and Chief Executive Officer  
(Principal Executive Officer)  

 

Date: January 24, 2020

 

A signed original of this written statement required by Section 906 has been provided to The InterGroup Corporation and will be retained by The InterGroup Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

 

 
 

 

 

EXHIBIT 32.2

 

Certification of Principal Financial Officer Pursuant to

18 U.S.C. Section 1350,

As Adopted Pursuant to

Section 906 of The Sarbanes-Oxley Act Of 2002

 

In connection with the Quarterly Report of The InterGroup Corporation (the “Company”) on Form 10-Q for the quarter ended December 31, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Danfeng Xu, Treasurer and Controller of the Company, serving as its Principal Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:

 

The Report fully complies with the requirements of Section 13(a) or 5(d) of the Securities Exchange Act of 1934; and
   
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ Danfeng Xu  
Danfeng Xu  
Treasurer and Controller  
(Principal Financial Officer)  

 

Date: January 24, 2020

 

A signed original of this written statement required by Section 906 has been provided to The InterGroup Corporation and will be retained by The InterGroup Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

 

 
 

 

v3.19.3.a.u2
Related Party and Other Financing Transactions
6 Months Ended
Dec. 31, 2019
Related Party Transactions [Abstract]  
Related Party and Other Financing Transactions

NOTE 11 – RELATED PARTY AND OTHER FINANCING TRANSACTIONS

 

The following summarizes the balances of related party and other notes payable as of December 31, 2019 and June 30, 2019, respectively.

 

As of   12/31/2019     06/30/2019  
             
Note payable - Hilton   $ 3,167,000     $ 3,325,000  
Note payable - Interstate     1,771,000       1,896,000  
Other notes payable     12,000       40,000  
Total related party and other notes payable   $ 4,950,000     $ 5,261,000  

 

Note payable to Hilton (Franchisor) is a self-exhausting, interest free development incentive note which is reduced by approximately $316,000 annually through 2030 by Hilton if the Partnership is still a Franchisee with Hilton.

 

On February 1, 2017, Justice entered into an HMA with Interstate to manage the Hotel with an effective takeover date of February 3, 2017. The term of the management agreement is for an initial period of 10 years commencing on the takeover date and automatically renews for an additional year not to exceed five years in aggregate subject to certain conditions. The HMA also provides for Interstate to advance a key money incentive fee to the Hotel for capital improvements in the amount of $2,000,000 under certain terms and conditions described in a separate key money agreement. The key money contribution shall be amortized in equal monthly amounts over an eight (8) year period commencing on the second (2nd) anniversary of the takeover date. As of December 31, 2019, and June 30, 2019, balance of the key money plus accrued interest is $1,004,000 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 December 31, 2019, the Company had finance lease obligations outstanding of $1,282,000. These finance leases expire in various years through 2023 at rates ranging from 5.77% to 6.25% per annum. Minimum future lease payments for assets under finance leases as of December 31, 2019 are as follows:

 

For the year ending June 30,      
2020   $ 246,000  
2021     492,000  
2022     482,000  
2023     182,000  
Total minimum lease payments